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CHAPTER ONE

INTRODUCTION

1.1            BACKGROUND OF THE STUDY

Inflation is neither new in the economy system of Nigeria nor the world at large. There have been in existence, variations in magnitude or rats.

The rate of inflation in Nigeria was about 10% between 1969 and 1970. In 1970, prices rose by about 14%( immediately after the war of 1970) then fell to 3% in 1972, rose by about 16.1% in 1974 and reached a rate of about 34% increase in 1975. Inflation seemed to be the greatest task to government’s policy makers in the 1970’s history.

In 1974, inflation rose to about 13 percent before the Udoji salary award of the same year only to leap to 34 percent in 1975 mainly as a result of the award. It went down gradually until it hit 10 percent in 1080. It went crazy and leapt to about 22% the following years and come down again to 7% in 1982. However, the official inflation figures are known to substantially understate the actual inflation rate. Nevertheless they act as a rough guide of the inflationary activities in the country.

Evidence has shown that inflation persist both the developed countries and developing countries, with difference in magnitude or rates, however, making comprising with present situation.

The rates in developing countries are more than those in the developed countries. The above-mentioned rates were attained during the seventeen century and the early part of the eighteenth century (1799-1807), and the early mid-parts of the nineteenth century (1969-1975).

(1)     Inflation simply means a continuous upward movement in the general price level, inflation does not mean that each and every price is rising, nor that all prices are rising at the same rate.

(2)       It is a process by which paper money loosed values, this depreciation is reelected quantitatively in a rise in prices. The fast prices rises in a given country, the faster its currency losses its purchasing power on the domestic market and through certain connecting link on foreign market too.

(3)        Inflation may be defined as a continuous rise in the price of goods of services a+ result of large volume of money in circulation used in the exchange of the few available goods and services.   Also, the high price of imported goods arising from increase in foreign price and instability of international exchange rate. Sub-charge from port congestion, storage facilities, marketing arrangements plus the distribution network, the impact of second tier foreign exchange market and removal of oil subsidy. There has been an increase in the price of oil since the removal  and this level led to price increment of most items, and increase in transportation fare is a living example at hared.  At this junction, it  worthy to note that all these issues accused accelerated increase in the  aggregate demand not being match by appropriate expansion in domestic output and the import of goods and services.  In conclusion, had inflation affected everyone in exactly the same way and degree, it would have no importance whatsoever, it’s social sign-finance arises from the fact that it always dose effect the people differently. It’s effect on personality, income and family background corporation, source of income , etc, also their locations, whether in the local places or ion the city are of relevance of the study’s.

The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy. High inflation is known to have many adverse effects: it imposes welfare costs on the society; impedes efficient resource allocation by obscuring the signaling role of relative price changes; discourages savings and investment by creating uncertainty about future prices; inhibits financial development by making intermediation more costly; hits the poor excessively, because they do not hold financial assets that provide a hedge against inflation; and reduces a countrys international competitiveness by making its exports relatively more expensive, thus impacting negatively on the balance of payments, and perhaps more importantly, reduces long-term economic growth (See Ghosh and Phillips, 1998; Khan and Senhadji, 2001; Billi and Khan, 2008; Frimpong and Oteng-Abayie, 2010). Overall, businesses and households are thought to perform poorly in periods of high and unpredictable inflation, Barro (1996).

Most policymakers, however, agree that they should not allow inflation to fall below zero because the costs of deflation are thought to be high, Billi and Khan (2008). Even though some evidence suggests that moderate inflation helps in economic growth, Mubarik (2005), the overall weight of evidence so far clearly indicated that inflation is inimical to growth. Consequently, policymakers should aim at a low rate of inflation that maximizes general economic well-being.

A considerable amount of literature examining the relationship between inflation and economic growth in both developed and developing economies are available. However, several of those studies focused specifically on whether the relationship between inflation and long-run growth is negative and a nonlinear one – positive or nonexistent relationship at low rate of inflation but becomes negative at higher rates, see Fischer (1993) who first identified the relationship. If such a nonlinear relationship exists, then it should be possible, in principle, to estimate the inflexion point, or a threshold, at which the sign of the relationship between the two variables would switch. Consequently, Khan and Senhadji (2001) produced the threshold level for both developed and developing countries in a cross-country panel data framework. The authors arrived at a threshold level range of 11 - 12 per cent for developing countries, including Nigeria. Even though cross-country studies were justified based on their ability to generalize empirical findings, specific country studies can provide specific evidence relevant for the country under study, as Kremer et al. (2009) suggested that inflation threshold in non-industrial countries and the appropriate level of inflation target might be country-specific. This becomes necessary due to heterogeneous factors obtainable in different countries. Although Chimobi (2010) examined the relationship between inflation and growth in Nigeria, no attempt was made to provide an optimal inflation rate for policy decisions. Fabayo and Ajilore (2006) arrived at a threshold level of 6 per cent for Nigeria using annual data from 1999 – 2013. However, Bruno and Easterly (1998) argue that the negative relationship between inflation and growth, typically found in cross-country regressions, exists only in high frequency data and with extreme inflation observations, which Khan and Senhadji (2001) confirmed that the extent of the relationship is stronger at high frequencies.

1.2 STATEMENT OF THE PROBLEM

The inflationary period is a time of high price of goods and service. Onah (2005) this works the quantity and type of products (good and services) purchasable by individuals and corporate body at any point in time. The problem passed by this, is that individuals and corporate bodies in the society are unable to purchase the quantity of desired products during inflation.

During inflation, income earners especially those with fixed income and very poor ones in the society find it difficult to match with the increasing prices of goods and services. This continues as long as price rises and there is fall in the purchasing power. Standard of living mustbe emphasized.More values of money is being required by individuals for the purpose of desired products during an inflation period as opposed to normal economic situations. This brings about decline in the purchasing power.                                                                                                 This results in a problem as the ability of individuals to purchase “products” in the light of continued rising prices become reduced.

Also of importance is the issues of inflation giving rising to the different society wish income as the distinction factor. There is a large gap between income of fixed income earners and profit earner. This is because the income profit earners rise with the rising prices of products as opposed to those of fixed income earners.

Again worthwhile to note is the fact that during inflation period, savings decline. This could analyzed the people tend to spent more of their income due to higher prices of products.

This result into a problem because a declaimed in savings gives birth to low investment which detents economic growth

The important questions to ask, there are how will the individuals be able to purchase the desired mix of products? How will the fixed income earners be able to maintain their standard of living at period of continuous rising in prices? How does a poor man make both and meet under a decline purchasing power? How will the government bridge the gap between the fixed income earners and profit earners?

1.3 OBJECTIVE OF THE STUDY

This research work titled “the effect of inflation on the economy, the specific objectives of this research work includes the following:

1.  To examine the effect of inflation rate on the economic growth of Nigeria.

2.  To identify the implication of inflation on the gross national product from 1999 to 2013.

3.  To evaluate the relationship between inflation and economic growth and development of Nigeria.

4.  To examine the inflation rate at which inflation has affected on the gross national product of Nigeria.

1.4 RESEARCH HYPOTHESIS     

The researcher formulated the following research hypothesis:

H0: Inflation rate has no effect on the economic growth of Nigeria

H1: Inflation rate has affected the economic growth of Nigeria.

H0: There is no significant relationship between inflation and economic growth and development of Nigeria.

H2: There is significant relationship between inflation and economic growth and development of Nigeria.

H0: Inflation has not affected the gross national product of Nigeria

H3: Inflation has affected the gross national product of Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

The significance of the study lies on the fact that an analysis of the meaning, causes and type and as well the effects of inflation on individuals and corporations, will give a more realistic outlook on how the population as a whole is being affected. It is believed that a study of this nature will expose the suffering of Individuals Corporation through its findings to policy makers, for formulating of most effective plans towards coping with inflation, and better living of life form every citizen.

Be of immense important for students in financial studies as a basis for further research work.

Expose the ordinary men to why they face a low standard of living.   Assist the planning of unit of government through the provision of more efficient feedback information on the effectiveness of their anti-inflationary policies.  It will help individuals and corporations in the planning of their marketing mix for their products.   It will help the IMF on how to advice the Nigerians to overcome the effects of inflation.

1.6 SCOPE AND LIMITATION OF THE STUDY

This study centres on the effect of inflation on the economy of Nigeria, examining the gross national product from 1999 to 2013.

In carrying out the investigation sources of data posed a problem of its own. It is difficult to lay hands on up to data statistical data for empirical analysis especially in developing countries such as Nigeria. In any case one had to mean the best use of what was available.
Resulting from the short time limit couple with the financial constraints, the researcher was limited to primary and secondary sources.
Generally the researcher suffers frustration owing to administrative logistics. Below are some of the identifiable limitations.
1. Unpublished data were rarely made available to researcher by government officers who avoid violation of the official secrecy act.
2. Secondary data on the subject was stale and scanty in most of the libraries visited including the state library.

1.7 DEFINITION OF TERMS

Open And Suppressed Inflation:Open inflation is the result of the uninterrupted operation of the market mechanism. There are no controls on the distribution of commodities by the government imposes fiscal and monetary controls to check open inflation.

Stag inflation:This is a situation whereby recession is accompanied by a high rate of inflation also called inflationary recessing. This type of inflation is caused by the excessive demand in commodity market and decrease in the demand for labor thereby causing prices to rise and creating unemployment in the economy.

Edmand –Pulll Inflation: This is a situation offer described as ‘too much money chasing few goods”, this arises as a result of increase in demand with a corresponding decrease/increase in the supply of goods and as a result the prices of these goods will rise.

ARTIFICIALLY CREATED INFLATION:This is a situation whereby traders sometimes create artificial scarcity by heading the commodities with the main aim of increasing the prices of their commodities.

COST-PUSH INFLATION:This is a situation where money wages rises more rapidly than the productivity of labour, cost-push inflation is caused by continues rise in the prices of factors of production, land, Labour, capital and entrepreneurship.

MAKE-UP INFLATION:This take of inflation is closely related to the price-push problem, modern labour organization set prices and wages on the basis mark-up over cost and relative income, firm possessing monopoly power have control over the prices and so level administered price, when strong trade unions are successfully in raising the wages of worker, it contribute to inflation. Having considered the types and cause of inflations it then lead to consideration of the effects of inflation in Nigeria Economy.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.


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