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CHAPTER TWO

LITERATURE REVIEW

 In this chapter we shall be reviewing some of the relevant literature relating to the subject matter. The review will begin with a brief discussion on exchange fate, we shall examine the various aspect of exchange rate. We shall also examine the effects which these aspects of exchange rate has had on the manufacturing industries in Nigeria.

 CONCEPT OF EXCHANGE RATES

 Exchange rate has been defined in so many ways either in terms of its role or function.  

 Lipsey and Steiner (1989) defined exchange rate as the price at which purchases and sale of foreign currency take place. It is the amount of one currency that must be paid in order to obtain one unit of another currency.

 Ajayi (1995) In his own definition sees the exchange rate as the relative price of two assets in one country in terms of another.

 FIXED VERSUS FLEXIBLE EXCHANGE RATE

 In a flexible exchange rate system, the Central Bank allows the exchange rate to adjust to equate the supply and demand of foreign currency. A flexible or free floating system means that the force of demand and supply are left entirely to determine the exchange rate without official intervention in the foreign exchange market. While a fixed exchange rate system is one by which a given country has its nurrerly’s rate of exchange pagged at a given parity rate in terms of some international money or currency. In such a system, the central Bank agrees to maintain the value of their currency within an agreed narrow band of fluctuations. The central Bank intervention is usually regarded as the official charges in exchange rate (Olukoy and 1992).

 REAL VERSUS NOMINAL EXCHANGE RATE

 The nominal exchange rate is the price of one currency in terms of another. The concept of nominal exchange rate is important in many respects. It determines the cost of imports to importers and the level of revenue to exports. While the real exchange rate attempts to measure the rate at which goods and service are exchanged between the domestic economy and the rest of the world. However, the real exchange rate is defined as the nominal exchange rate deflated by the under of relative inflation rates (A Jayl, 1995).

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