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The Analysis Of The Impact Of Unemployment And Inflation On Balance Of Payment In Nigeria (1980-2010)
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The balance of payment is a record of all economic transaction involving
payment and receipt between the residents of one country and the
residents of other countries of the world in any period usually in one
calendar year. Specifically the balance of payment records the import of
goods and services, income transfer as well as changes in country
liabilities to claim assets on the rest of the world. It is a flow not a
stock concept and involves more than payment, that is transaction that
are not paid in cash and kind, deferment of debt, services payment due
to unremitting profits among others. Exceptional financial items means
those transactions that finance balance of payment needs or are
undertaken to bridge the gaps in the balance of payment. As a result of
the importation of crude oil in the economy, Nigeria balance of payment
is divided into oil and non-oil sectors. The oil sector is the most
significant components of the economy and the largest foreign earner.
In
assessing the cost of inflation distinguish between perfectly
anticipated inflation which occurs when the rate of inflation is
expected and has been taken into economic transaction that is the
exchange rate will be adjusted tp eliminate any adverse effects of
inflation on the balance of payment. For instance, ’’if Nigeria
inflation rate is above that of her competition the value on naira would
depreciate quickly to restore price competitiveness, but in reality
exchange rate do not adjusted perfectly anticipated inflation rate means
unexpected inflation.
One of the causes of balance of payment
problems is domestic inflation. Inflation create no problem for the
balance of payment if all one’s competitor are also inflating at the
same rate since it is relative prices that matters in international
trade as domestic trade if however, one country’s price level is rising
faster than the levels of competitors countries, imports will rise more
than the levels of export and balance of payment problem will ensure
moreover, a necessary condition to concern about the balance of payment
in the policy decision is support a fixed exchange rate rather than
allow the rate to be determined in free market, so as to eliminate
fluctuation in the balance of payment rate.
In the recent years there
has been emphasis laid pertaining to the relationship between inflation
and unemployment. According to Milton Friedman, high inflation increase
unemployment in several ways:
I. High inflation may lead to
government to impose wages and price control thereby impending market
forces which increase unemployment.
II. High inflation rate increase the risk associated with any assessment of future returns on investment.
III. High inflation may depress consumption as it reduces the purchasing power of any currency.
Friedman’s
observation shows that there is a positive link between the rate of
inflation and the rate of unemployment. That is, inflation and
unemployment moves in the same direction. The question at this point is
does inflation and unemployment really moves in the same direction, do
they move in the same direction in Nigeria? What is the trade off like
in Nigeria? Although low rate of inflation is an advantage to a country,
it could be argued that the disadvantages of inflation are greater than
its advantage.
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