– Exchange Rate Fluctuations and Trade in Nigeria –
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INTRODUCTION
Background of the Study
Trade involves the transfer of goods and/or services from one person or entity to another, often in exchange for money.
The concept of trade has gained wide recognition due to the existence of specialization and division of labour, in which most people concentrate on a small aspect of production, but use that output in trades for other products (Oyejide, 2006).
International trade has flourished over the years due to the many benefits it has offered to different countries all over the world. The advent of globalization has led to an increasing demand for international trade.
According to Oyejide (2006), international trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance.
The international trade accounts for a good part of a country’s gross domestic product. In international trade, the importation and exportation of goods are limited by the exchange rate, import quotas and mandates from the customs authority of various countries participating in global trade (Bah and Amusa, 2013).
The importing and exporting jurisdictions of various countries may impose a tariff on the goods and services traded in the global market. In addition, the importation and exportation of goods are subject to trade agreements between the importing and exporting jurisdictions of participating countries.
According to Chowdhury (2013), fluctuations are upward or downward movement in the prices of products in an economy. Fluctuations in prices are a common phenomenon in the economic world, particularly among producers of agricultural products.
More so, fluctuations in the level of the national income of a country representing growth or contraction. A market economy is not static. It’s dynamic.
A rise in national income means an economy is growing, while a decline in national income means that an economy is contracting. The current economic model describing economic fluctuations in a market economy is the business cycle.
The exchange rate is defined as the rate at which one currency is exchanged for another, usually between countries. From this definition above, exchange rate is regarded as a price of one’s country currency in terms of another country’s currency.
Thus, the exchange rate between the naira and the dollar refers to the amount of naira required to purchase a dollar. According to Obaseki (2013) the exchange rate of a particular currency measures the worth of a domestic economy in terms of another.
He went further to identify other importance of exchange rate as; it measures the external value of a currency,it provides a direct relationship between the domestic and foreign prices of goods and services, etc.
Supporting the above, Iyoha (2008) opines that foreign currency is required for making payments to other countries for goods, services, interest payments on loans for investment.
Thus, Nigeria’s demand for US dollars, British Pound Sterling, French francs and Japanese Yen is largely derived from Nigeria’s demand for American, British, French and Japanese goods respectively.
Nigeria’s supply of these currencies is earned by its exports to those countries. Therefore, understanding the behaviour of the exchange rate fluctuation and its impact on trade is very significant.
Edwards (2004) is of the opinion that under the flexible exchange system, the exchange rate is determined by the interplay of the forces of demand and supply, increase in imports leading to increase in demand for the foreign currency of the exporting country while an increase in exports leads to increase in the supply of that foreign currency.
A rise in the general level of internal prices will stimulate demand for imports which now become relatively cheaper. This will increase demand for foreign currency without there being an increase in its supply and so there will be a tendency for the home currency to depreciate (Oyejide, 2008).
If prices in all countries are rising, the effects on the exchange rates will cancel out. The extent to which a country must pay attention to the value of its currency in terms of others will determine the extent of its freedom of action with regard to its internal monetary policy.
A country with a large volume of internal trade or transactions will probably be more interested in the internal value of its currency than one which is more nearly self-supporting (Iyoha, 2008).
Therefore, the extent to which exchange rate fluctuation determines the trade of a country depends largely on the extent to which the country depends on imported goods and services for survival.
From a macroeconomic point of view, exchange rate variation exerts strong effects on the economy, as they may affect the structure of output and investment, lead to inefficient allocation of domestic resources and external trade, influence labour market and prices, and alter external accounts (Aron, Elbadawi and Cornel, 2009). Hence, shifts in the exchange rate affect international trade directly and indirect.
REFERENCES
Adeyemi A. O., Paul O. S, and Oluwatomsin M. T (2013). Estimates the long run effects of exchange rate devaluation on the trade balance of Nigeria. European scientific journal. 9(8), pp 1-25
Alexander, S. H. (1952). Effect of devaluation on a trade balance. Journal of International monetary Fund Staffs. 5(2), pp 1-16.
Aron, J. O, Elbadawi, I. A. and Connell, S. A. (2009). Exchange rat and its effect on economic growth of Africa. Management journal; 9(8): pp1-23.
Aron, J., Elbadawi, I. A. and Connell, S. A. (2009). Determinants of real exchange Rate in South Africa international journal of economics 15(14), pp 1-18
Bah, I. K and Amusa, H. A. (2003). Real Exchange rate fluctuations and foreign trade: Evidence from South Africa’s Exports to the United States. The African Finance Journal (5)2: pp 1 – 24.
Bah, I. and Amusa, H. A. (2003). Real Exchange rate fluctuations and foreign trade: Evidence from South Africa’s Exports to the United States. International Finance Journal 8(7): pp 1-25
Broda, A. I., Christian, N. O. and John R. S, (2003).Identifying the Effect of Exchange Rate.Journal of International Money and Finance 10(9): pp 1-30.
Broll, U. A and Eckwert, B. I (2009).Exchange rate fluctuations and international Economic Journal 30(25): pp 1-27.
Chowdhury, A. R. (2013) Does exchange rate fluctuations depress Trade flows? Evidence from Error-Correction Models. Review of Economics and Statistics, 31(25): pp 1-10.
Côté, A. (2004). Exchange rate volatility and trade: A Survey. Bank of Canada. Working Paper.
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