INTERNATIONAL TRADE

Definition: International trade also known as foreign trade or external trade involves the
exchange of goods and services between two or more countries. The principle underlying
the buying and selling between one country and another is specialization. The theory of
International trade, therefore, is based on the principle of comparative cost as propounded
by David Richardo. The theory states that a country should specialize in the production of
goods and services for which it has cost advantage over another country. This, he pointed
out will bring about the production of goods at cheaper cost. For example, Nigeria
purchases goods like automobiles and electronics from oversea countries and sells
commodities like Cocoa, Groundnut, Crude oil, etc to them.
<

Types of International Trade

There are two major types of international trade. These are:

(1) Bilateral international trade: Bilateral international trade is a trade agreement in which
two countries exchange goods and services. It occurs when each country tries to balance
its payments and receipts separately and individually with each other.
(2) Multilateral international trade: multilateral international trade is a type of internal trade
in which a country trades with many other countries. This ensures international division of
labour. It is a type of trade in which many countries exchange their goods and services.
E.g. Nigeria trades with the USA. Britain and Japan. Multilateral international trade is
necessary if the total volume of world trade is to be raised to its maximum.

Internal Trade

Definition: Internal trade, also known as domestic trade or home trade involves the
exchange of goods and services among the people within a particular country. Internal trade
involves the buying and selling of goods and services within a particular country e.g.
Nigeria. The items of internal trade include those goods and services which are produced
and sold internally or locally. In Nigeria for example, such items include yam, coffee,
maize, rice and many other locally manufactured goods.

Similarities and Differences between International Trade and Internal Trade

(a) Similarities.
(1) Both international trade and internal trade involve the use of money as a medium of
exchange.

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(2) They are also similar in that they both involve a degree of specialization between the
trading partners, since specialization causes exchange.
(3) Both forms of trade involve the activities of middlemen.
(4) Both of them arise due to inequitable distribution of natural endowments and production
resources.

(b) Differences
1) Foreign trade involves the exchange of goods and services across national frontiers
while internal trade involves the exchange of goods within the borders of a country.

2) There is possibility of restriction – tariffs, import duties, export duties, quotas,

embargoes – when goods are exchanged across national boundaries while this does not
occur in home trade.

3) There are differences in systems of weighing and measuring in one country vis-à-vis
another. A country has only one system of such weighing and measuring.

4) Differences in transport cost due to distance between buyers and sellers, documentation
requirement, need for insurance in respect of foreign trade distinguish foreign trade
from home trade.

5) There are also differences in legal systems and culture under international trade but the
legal systems are the same in domestic trade.

6) Foreign trade requires knowledge of new language and interpretations while in

domestic trade, common language is used.

REASONS OR BASIS FOR INTERNATIONAL TRADE

Countries engage in international trade for the following reason:

(1) Uneven distribution of natural resources: natural resources are unevenly distributed.
While some countries are naturally blessed, others have little or no natural resources.
This necessitates international trade.
(2) Difference in climatic condition: the climatic condition of the earth varies from one
region to another. This variation gives rise to growth of different crops, hence the need
for exchange.

2
(3) Differences in technology: the level of technology differs from one nations of the
world to another. Some countries with advanced technology can produce some
industrial products at reduced cost and sell to the less developed countries.
(4) Expansion of market for products: foreign trade came into existence because of the
need to widen the market for goods produced by a country.
(5) Differences in the efficient use of natural resources: Foreign trade may arise because
of differences in efficiency in the use of natural resources.
(6) Differences between patterns of production and consumption: The differences
between patterns of production and consumption in different countries necessitate
international trade.
(7) Differences in taste: Differences in taste of various countries call for international
trade.
(8) Desire to improve the standard living: Countries engage in international trade in
order to improve the standard of living of the people.

BARRIERS OR PROBLEMS OF INTERNATIONAL TRADE

(1) Language Problem: Different languages are spoken by different countries of the
world. Communication between businessmen from various countries with different
linguistic background may be difficult.

(2) Problem of distance: It may take days or weeks before one moves from one countries
to another because of the long distances involved. This may delay quick exchange of
goods and services e.g. Nigeria and Japan.

(3) Numerous documents: the documents used in international trade are two many. This
makes the processing of foreign trade too long and sometimes cumbersome e.g. bills
of exchange, ship manifest, certificate of origin, etc.

(4) Differences in currency: Every country has its own currency which is different from
the currency of other countries. In foreign trade, the currency must be converted
before meaningful transactions can take place.

(5) Trade imbalance: International trade often leads to trade imbalance among nations
with the effects that viable countries may not transact business with the weaker ones.

(6) Government policy: Foreign trade can be hindered by the political ideologies of
different countries. A country can deliberately decide not to trade with another
country because of its political differences e.g. the USA and Libya in 1988.

3
(7) Weights and measures: There is no international uniformity in the system of
weighing and measuring of goods. The system is not standardized, hence it has to be
converted and this hinders trade.

(8) Artificial barriers: Foreign trade can be hindered through the imposition of outright
ban on products, quota systems or imposition of licenses on goods.

(9) Transport/Communication: Businessmen from different countries especially African

countries find it difficult to contact their partners in other countries because of poor
communication and transport facilities. This hinders foreign trade greatly.

(10) Religion/Culture: Religious beliefs and culture differ from one country to another
and these can constitute a hindrance to international trade.

ADVANTAGES OF INTERNATIONAL TRADE

(1) Sources of revenue: International trade is a source of revenue for nations of the
world. Nigeria derives 90% of its revenue from the sale of crude oil to other
countries. Taxes can also be imposed on exported and imported goods.

(2) Promotion of economic development: International trade helps countries to gain

technical knowledge which accelerates economic developments e.g. farmers in
Nigeria can now import tractors, harvesters etc. to practice large scale farming.

(3) Provision of employment opportunities: As a result of international trade

contacts, foreign investors can establish firms in sister countries which will create
employment opportunities for its citizens.

(4) It leads to international specialization: Through international trade, countries will

specialize in the production of goods for which they have comparative advantage
over others. This will make prices of such goods cheaper.

(5) Increase in world output: When countries specialize in the production of goods
and services in which they have comparative advantage and where full utilization
of resources is made, the world output will increase.
(6) Availability of variety of goods: Through foreign trade, wide variety of goods are
made available. West African countries can import cars, electronics, shoes and
equipment etc. from other countries. New products are produced for new markets.
(7) Acquisition of skills and ideas: Through international trade, new ideas, skills and
techniques can be acquired to improve the quality of goods and services.

4
 (8) It fosters closer international relationship: Foreign trade brings about prospects
for peace in the world. There is familiarity, understanding, peace and harmony in
the world when people from different races trade together.

(9) Increase in standard of living: Since there is exchange of different goods and
services among countries, the standard of living increases. People can get what they
need which they cannot ordinarily produce.

(10) Equitable distribution of national resources: Natural resources found in

one country are used in another country of the world through foreign trade.

Disadvantages of international Trade

(1) Encouragement of dumping: international trade can lead to dumping of goods into
the less developed countries by multinational companies from the developed nations. These
countries therefore become dumping grounds for all kinds of produce

(2). It affects infant industries: Foreign trade also affects newly established industries
(infant industries) negatively as they cannot complete favorably with their well-established
foreign counterpart.

(3). Destruction of cultural values of a country: importation of certain goods such as x-

rated films, and immoral fashion. Etc. can destroy the moral and cultural values of a
country. It can thus lead to decadence in social norms. For example in Nigeria, massive
importation and use of miniskirts from America is anti-cultural and against our social
norms.

(4). Importation of dangerous or harmful goods: through foreign trade, harmful or

dangerous goods can be imported into a country by unscrupulous.

(5). Creation of balance of payment deficit: this is possible when foreign trade is not
restricted and the level of import is higher than export. This may lead to a drain in the
foreign exchange reserve which can result in balance of payment problems.

(6). Unemployment: foreign trade can lead to unemployment because continued

importation of cheaper products from foreign countries may reduce the level of production
of local industries producing similar products and this may result in retrenchment of
workers

(7). Reduction of efforts to attain self-reliance: Uncontrolled and unrestricted inflow of

goods can reduce effort to attain self-reliance because the people can always get what they
want from abroad, hence the culture of self – sufficiency will be destroyed
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(8). It leads to exploitation: The developed nations which are highly industrialized may
use their advantageous position to exploit the less developed countries.

International trade can be divided into three: Import, export and entrepot trades

a. Import Trade
Definition: Import trade is defined as the act of buying goods from other countries
as the act of buying goods and services from other countries it is sometimes
restricted to control a country’s balance of payment. The goods are imported either
visible or invisible
a. Visible imports: visible imports consist of goods that can be seen and touched
i.e. tangible goods which come from other countries Nigeria’s visible imports
for example include automobiles, electronics, plants and machine. Etc.
b. Invisible imports: invisible import consist of services rendered by other
countries that cannot be seen or touched. Examples of invisible imports are
banking, tourism, aviation, etc. this will appear in the balance of payments
b. Export trade
Definition: Export trade may be defined as the act of selling goods and services to
other countries. It is the selling of a country’s product aboard. Some government
frequently attempt to encourage exporters by introducing export subsidy. Export can
equally be divided into visible exports.
I. Visible export: these consist of goods which are sold in oversea market i.e. to other
countries. In Nigeria, visible exports are cotton, groundnut, palm oil, crude oil,
textiles, etc.
II. Invisible export: Invisible exports consist of services rendered to other countries.
Such services include transport, banking, insurance and other consultancy services.

(c) Entrepot
Definition: Entrepot is a form of foreign trade in which goods shipped into one part are
subsequently re-exported to another port. If customs duty had been paid on imported goods
which we later re-exported, the duty can be claimed back. Simply put, entrepot is the re-
exporting of goods imported from other countries.

Balance of trade and balance of payment

Balance of trade: Balance of trade refers to the total value of goods sold and bought by a
country during a given period usually a year when visible exports equal visible imports in
monetary terms we have balance of trade. A positive balance of trade means that a country
is exporting more in monetary terms than it is importing while a negative or unfavourable

6
balance of trade means that a country is importing more in monetary terms than it is
exporting.
Balance of payment : Balance of payment may be defined as a statement or record
showing the relationship between a country’s total payment to other countries and its total
receipts from them in a year. A country’s balance of payment can be grouped into three
parts, namely current, capital account and monetary movement accounts.
1. Current account: current account is composed of receipts and payment is
composed of receipts and payment for visible services are insurance banking,
transport, interest payment and tourism while visible goods are automobiles, cocoa,
cotton, crude oil.
2. Capital account: capital account is made up of the inflow of capital both in long
and short terms. It consists of capital movement in the form of investment, loans
and grants.
3. Monetary movement account: This account shows how the balance of both current
and capital accounts are settled.
Favorable balance of payment
Favorable balance of payment occurs when the receipts from invisible and visible
export trade become greater than payment to other countries on invisible and visible
imports. A credit balance can be used to a country’s gold reserve.
Unfavorable balance payment
Unfavorable balance of payment is used for a debit balance of payment. It means that
payments on visible and invisible import are greater than receipts on visible and
invisible exports. It can be referred to as adverse or deficit balance
For more discussion on balance of payment see chapter 27 of this book
Procedures for international Trade
For international trade to take effect, certain procedures must be followed. The step by
step procedures are:
(1) The importer and exporter are brought together through different means e.g. letter
of inquiry.
(2) The next step is for the producer to send quotations to buyer in reponse to the letter
of inquiry. The quotation will show the description and features of the products
(3) After receiving the quotation the importer will place an order with the manufacturer.
The indent will show details of goods, prices and date of delivery
(4) The next step is to make arrangement for payment through any greed means of
payment e.g. documentary credit, telegraphic mail, transfer, etc.

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 (5) Then, an agreement for the goods to be shipped through a shipping company will
be made. The shipping agent will get all the necessary documents like shipping note,
calling forward note, etc. the goods will be packed and well arranged in containers.
(6) The exporter will then prepare and send copies of bill of lading to the importer in
advance. Other documents will accompany the consignment will be prepared and
sent.
(7) When the goods arrives, the clearing agent will process and complete all necessary
documents. The agent will check the manifest to ensure that the goods are on board.
The custom personnel will access the consignment and complete the duties to be
paid.
(8) The goods will be taken to the warehouse after all necessary documentation have
been completed.
TARIFFS OR RESTRICITIONS TO TRADE

Definition: Tariffs are taxes or duties imposed on imports and exports by the government
of a country. The idea behind tariffs is to restrict the volume of trade or improve the
international terms of trade.

Reasons for imposition of tariffs or restrictions of trade.

The reasons why countries impose tariffs or restrictions on international trade include the
following:

1. To protect infant industries: Tariffs are imposed to protect infant industries from
undue competition with foreign trade.
2. Generation of revenue: Tariffs are also imposed to generate revenue for the
country. Many countries derive their revenue from import and export duties.
3. To prevent dumping: Tariffs are imposed to prevent dumping of goods from
foreign countries. This is to prevent foreign goods from being sold at prices lower
than the home price.
4. To improve balance of payments deficit: by imposing tariffs on imported goods,
the unfavourable balance of payments can be corrected because importation will be
discouraged.
5. Retaliatory measures: This can be used in retaliation against countries which
impose taxes on their imports.
6. To prevent importation of dangerous goods: Dangerous or harmful goods from
other countries are prevented from being imported through restriction.
7. Employment generation: Countries impose tariffs to encourage the establishment
of local industries or enhance the expansion and growth of existing ones so as to
provide job opportunities.

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 8. Political motive: Tariffs can be introduced as discriminatory measure against
unfriendly countries.
9. To promote self-sufficiency: Tariffs are also imposed on imported goods to enable
a country be self-sufficient in production of numerous goods.
10. To check consumption pattern: If all sorts of goods are allowed to come into the
country, the citizens will develop uncontrolled appetite for foreign goods.
11. To protect strategic industries: Tariffs may be used in most cases to protect
certain strategic industries.

TOOLS OR INSTRUMENTS OF TRADE RESTRICTIONS

Tools or instruments normally used for international trade restriction include the
following:

1. Import duties or tariffs: This is a tax imposed on imported goods to reduce the
amount of trade.
2. Foreign exchange control: Trade can be controlled by reducing the foreign
exchange available for trade transactions.
3. Devaluation: By lowering the value of a country’s currency vis-à-vis others,
importation becomes costly while export becomes cheaper.
4. Embargo: This is the prohibition or outright ban placed on some imported goods.
5. Import monopoly: This refers to a situation in which the government of a country
takes over the importation of certain goods which are only essential to the country.
6. Import quota: Import quota restricts imports by imposing a limit on the quantity
of goods that can be imported at a particular country.
7. Preferential duties: In order to either encourage or discourage the importation of
certain goods form certain countries, discriminate duties are charged on these goods.
8. Excise duties reduction: This method helps to reduce the prices of locally made
goods so as to enable people to patronize them instead of foreign made goods.
9. Import Licence: Import licence is a permit that allows an importer to bring a
certain quantity of foreign goods into a country and allows him to purchase the
foreign currency required to pay for them.

EXPORT PROMOTION

DEFINITION: Export promotion also called export drive may be defined as any policy
by which government encourages producers of export goods to produce and export more
in order to earn more foreign exchange

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Measures taken by government towards export promotion

1. Reduction of export duties: Export can be promoted by reducing export duties.

2. Subsidy for export based industries: The cost of producing export commodities
by export based industries can be subsidized.
3. Granting of tax incentives: Tax incentives can be given to export based industries.
4. Setting up of export promotion agencies: Export promotion agencies to
encourage exporters can be set up. E.g. export processing zone (EPZ) in Calabar.
5. Retention of part of foreign exchange earned from exports: Exporters should be
allowed to retain part of the foreign exchange earned from exports.
6. Infrastructural development: Infrastructural facilities like seaports, airports,
communication, e.t.c. should be developed so as to facilitates or promote
exportation of goods.
7. Reduction of freight rate: Freight rate on exports can be reduced to encourage
exporters.
8. Granting of credit facilities: Credit facilities can be granted or offered to exporters
in order to promote export.
9. Devaluation of local currency: The local currency can be devalued to make export
cheaper.
10. Organising international trade fairs: International trade fairs should be organized
periodically in order to attract foreign importers.

Terminologies in International Trade

1. Free Trade: Free trade refers to non-restriction o international trade. Buying and
selling can take place between different countries without the imposition of artificial
barriers such as absence of custom quotas, embargoes. There is perfect mobility of
commodities and factors of production between countries.
2. Infant Industries: Infant industries are newly established industries. They are still
in their tutelage and must be protected from foreign companies to safeguard their
survival.
3. Devaluation: Devaluation is the lowering of the exchange value of a country’s
currency vis-à-vis other currencies. This makes import to be expensive and export
to be more attractive.
4. Depreciation: Depreciation refers to the fall in the value of a country’s currency
against other currencies as a result of the interplay of the forces of demand and
supply.

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 5. Dumping: Dumping is the practice of selling goods in foreign countries at lower
prices than what are obtainable in the exporting country.

Globalization is the action or procedure of international integration arising from the interchange
of world views, products, ideas, and other aspects of culture.[1] Advances in transportation (such
as the steam locomotive, steamship, jet engine, and container ships) and in telecommunications
infrastructure (including the rise of the telegraph and its modern offspring, the Internet and mobile
phones) have been major factors in globalization, generating further
interdependence of economic and cultural activities

In 2000, the International Monetary Fund (IMF) identified four basic aspects of
globalization: trade and transactions, capital and investment movements, migration and
movement of people, and the dissemination of knowledge.[9] Further, environmental challenges
such as global warming, cross-boundary water and air pollution, and overfishing of the ocean are
linked with globalization.[10] Globalizing processes affect and are affected
by business and work organization, economics, socio-cultural resources, and the natural
environment. Academic literature commonly subdivides globalization into three major areas:
economic, cultural globalization, and political globalization.[

The term globalization is derived from the word globalize, which refers to the emergence of an
international network of economic systems. Elizabeth King defines globalization as "all those
processes by which the people of the world are incorporated into a single world society.:
"Globalization can thus be defined as the intensification of worldwide social relations which link
distant localities in such a way that local happenings are shaped by events occurring many miles
away and vice versa

: Economic globalization
Economic globalization is the increasing economic interdependence of national economies across
the world through a rapid increase in cross-border movement of goods, services, technology, and
capital.[65] Whereas the globalization of business is centered around the diminution of international
trade regulations as well as tariffs, taxes, and other impediments that suppresses global trade,
economic globalization is the process of increasing economic integration between countries,
leading to the emergence of a global marketplace or a single world market.. Economic
globalization comprises the globalization of production, markets, competition, technology, and
corporations and industries.[65] Current globalization trends can be largely accounted for by
developed economies integrating with less developed economies by means of foreign direct

11
investment, the reduction of trade barriers as well as other economic reforms, and, in many
cases, immigration.

Cultural globalization
Cultural globalization refers to the transmission of ideas, meanings, and values around the world
in such a way as to extend and intensify social relations.[75] This process is marked by the common
consumption of cultures that have been diffused by the Internet, popular culture media, and
international travel. This has added to processes of commodity exchange and colonization which
have a longer history of carrying cultural meaning around the globe. The circulation of cultures
enables individuals to partake in extended social relations that cross national and regional borders.
The creation and expansion of such social relations is not merely observed on a material level.
Cultural globalization involves the formation of shared norms and knowledge with which people
associate their individual and collective cultural identities. It brings increasing interconnectedness
among different populations and cultures.[76]
Cross-cultural communication is a field of study that looks at how people from differing cultural
backgrounds communicate, in similar and different ways among themselves, and how they
endeavour to communicate across cultures. Intercultural communication is a related field of study.
Cultural diffusion is the spread of cultural items—such
as ideas, styles, religions, technologies, languages etc. Cultural globalization has increased cross-
cultural contacts, but may be accompanied by a decrease in the uniqueness of once-isolated
communities. Religions were among the earliest cultural elements to globalize, being spread by
force, migration, evangelists, imperialists, and traders. Christianity, Islam, Buddhism, and more
recently sects such as Mormonism are among those religions which have taken root and influenced
endemic cultures in places far from their origins.[80]
Globalization has strongly influenced sports.[81] For example, the modern Olympic
Games has athletes from more than 200 nations participating in a variety of competitions.[82] FIFA
World Cup is the most widely viewed and followed sporting event in the world, exceeding even
the Olympic Games; a ninth of the entire population of the planet watched 2006 FIFA World Cup
Final.[83][84][85][86]
The term globalization implies transformation. Cultural practices including traditional music can
be lost or turned into a fusion of traditions. Globalization can trigger a state of emergency for the
preservation of musical heritage. Archivists may attempt to collect, record, or transcribe repertoires
before melodies are assimilated or modified, while local musicians may struggle
for authenticity and to preserve local musical traditions. Globalization can lead performers to
discard traditional instruments. Fusion genres can become interesting fields of analysis.[87]

Political globalization

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Intergovernmentalism is a term in political science with two meanings. The first refers to a theory
of regional integration originally proposed by Stanley Hoffmann; the second treats states and the
national government as the primary factors for integration.[100] Multi-level governance is an
approach in political science and public administration theory that originated from studies
on European integration. Multi-level governance gives expression to the idea that there are many
interacting authority structures at work in the emergent global political economy. It illuminates the
intimate entanglement between the domestic and international levels of authority.
Increasingly, non-governmental organizations influence public policy across national boundaries,
including humanitarian aid and developmental efforts.[101] Philanthropic organizations with global
missions are also coming to the forefront of humanitarian efforts; charities such as the Bill and
Melinda Gates Foundation, Accion International, the Acumen Fund (nowAcumen) and
the Echoing Green have combined the business model with philanthropy, giving rise to business
organizations such as the Global Philanthropy Group and new associations of philanthropists such
as the Global Philanthropy Forum.
As a response to globalization, some countries have embraced isolationist policies. For example,
the North Korean government makes it very difficult for foreigners to enter the country and strictly
monitors their activities when they do.
The Advantages of Globalization

♦ Faster growth: economies that have in the past been open to foreign direct investments have

developed at a faster rate.

♦ Cheaper imports: this is down to the simple fact that if we reduce the barriers imposed on

imports (e.g. tariffs, quota, etc.) then the imports will fall in price

♦ New technologies: by having an open economy we can bring in new technology as it happens

rather than trying to develop it internally

♦ Spur of foreign competition: foreign competition will encourage domestic producers to

increase efficiency. Carbaugh (1998) states that global competitiveness is a bit like golf, you get

better by playing against people who are better than you.

♦ Increase consumer income. Multination will bring up average wage levels because if the
multinationals were not there the domestic companies would pay less.

13
♦ Increased investment opportunities: with globalization companies can move capital to whatever
country offers the most attractive investment opportunity. This prevents capital being

trapped in domestic economies earning poor returns.

Disadvantages of Globalization.

The negative drivers of globalization include culture which is a major hold back of globalization.
An example of how culture can negatively affect globalization can be seen in the French film
industry. The French are very protective of this part of their culture and provide huge grants to
help its development. As well as government barriers, market barriers and cultural

barriers still exist.

Also a negative aspect to a countries development is war e.g. tourism in Israel fell by 40% due to

the latest violence.

Another step to reverse globalization would be for governments to club together to curb the
power of multinational by negotiating new trade and treaties that would remove the subsidies
powering globalization and give local production a chance.

Douthwaite also states that the global economy is itself nothing less than a system of structural

exploitation that creates hidden slaves on the other side of the world

Further arguments put forward against globalization by Mr. Lawton include that it actually
destroys jobs in wealthy advanced countries. This is due to the lower costs of wages in

developing countries.

Also there is the loss of sovereignty that globalization brings. Many anti-globalization believers

state that nations are losing their identity and selling their soul.

There are environmental factors of globalization as described earlier. These are becoming

14
more and more controversial. Technology, though usually viewed as a positive aspect of
globalization, also has some negative points. Jeffry Sachs (2000) argues that technology is now
what divides the world.

Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the following eight
factors:

 Technology is expanding, especially in transportation and communications.

 Governments are removing international business restrictions.
 Institutions provide services to ease the conduct of international business.
 Consumers want to know about foreign goods and services.
 Competition has become more global.
 Political relationships have improved among some major economic powers.
 Countries cooperate more on transnational issues.
 Cross-national cooperation and agreements.
Factors that are drawing more and more companies into foreign market

1. Higher profit opportunities in international markets. When a company discovers that some
foreign markets present higher profit opportunities than the domestic market, such
company would prefer operating in international market than just limiting its resources to
domestic’s markets only.
2. Lager customer base
It is necessary to say that the degree of customer base in international is far greater than
the domestic base. Companies prefer entering international marketing which to secure large
customer base which will invariably increase their productivity and sales, thereby
generating higher profit.
3. Economies of Scale The larger the base of customers of an organization, the larger the
economies of scales. A company can only achieve economies of scales if the company has
a large customer base and such large customer base is a product of international marketing.
4. To reduce dependency on one market A local company will definitely depend on local
markets but an international/global company will not depend on local market but extends
to foreign markets.
5. To offer better products or lower prices. Firms’ ventures into international market in order
to offer better products or lower process and can also attack the company’s domestic
markets. At times, global companies may want to counter attack competitors in their home
markets.

15
6. When company’s customers are going abroad and require international servicing. When a
company’s customer go international, definitely for such company to move incline with
company’s customers by going international.
Factors to be considered before going international (global)

1. Foreign customer’s preferences and needs.

It is better to understand the preferences and needs of foreign customers as well as offering a
competitive products or packages that will help in satisfying the needs and preferences.

2. Foreign country business culture.

It is better to understand the business of a foreign culture before entering the foreign market.
If the foreign cultures are not known, it will be difficult to deal with foreign national which
will invariable has an adverse effect on the business.

3. Foreign country regulation

A company might under estimate foreign country regulations and incur unexpected costs. This
is a strong factor that has to be considered before entering a foreign market, otherwise, it will
adversely affect the organization.

4. No of international experienced managers

Before entering into an international market, it is necessary to understand and estimate the
member of international experienced managers of the firm. A company with unsufficient
experienced managers may face difficulties in international arena.

5. Foreign country commercial

Its economy, political situation etc. the foreign country commercial laws as well as its external
environment before an organization/company can succeed effectively in a foreign market.

6. Foreign Language It is necessary to understand the language of the host country in order
to transact effectively.
7. The company has to define its international marketing objectives and policies
8. Determine whether to market in a few countries or many countries.
Mode of Entering International Foreign Market

Once a company decides to target a particular country, it has to determine the best mode of
entry. Its broad choices are:

1. Indirect exporting
2. Direct exporting
3. Licensing
4. Joint venture

16
5. Direct investment.
1) Indirect Exporting
This is the process whereby companies export their products through independent
intermediaries. Domestic based export merchants buy the manufacturer’s products and them
sell them abroad. Domestic based export agents seek and negotiate foreign purchases and are
paid a commission. Export management companies agree to manage a company’s export
activities for a fee.

Indirect exporting has two advantages

1. It involves less investment the firm does not have to develop an export department, an
oversea sales force etc.
2. It involves less risk.
2) Direct Exporting
The normal way to get involved in an international marketing is through export. Occasional
exporting is a passive level of involvement in which the company exports from time to time,
either on its own initiative or in response to unsolicited order from abroad. Active exporting
takes place when the company makes a commitment to expand into a particular market. In
either case, the company produces its goods in the home country and export to international
market.

3) Licensing
Licensing is a simple way to become involved in international marketing. The licensor issues
a license a license to a foreign company to use a manufacturing process, trademark, patent,
trade secret, or other item of value for a fee or royalty. The licensor gains entry at little risk;
the licensee gains production expertise or a well-known product or brand name.

Licensing has potential disadvantages. The licensor has less control over the licensee than it
does over its own production and sales facilities. Furthermore, if the licensee is very successful,
the firm has given up profit, and if and when the contract ends, the company might find that it
has created a competitor. To avoid this, the licensor usually supplies some proprietary
ingredients or components needed in the product.

4) Joint Ventures
Foreign investors may join with local investor to create a joint venture country in which they
share ownership and control. Example

1. Cocacola and Nestley joined forced to develop the international market for ‘ready to drunk’
tea and coffee, which currently they sell in significant amount in japan.

17
 2. A joint venture may be necessary or desirable for economic or political reasons. The
foreign firm might lack the financial, physical or management resources to undertake the
venture alone, or the foreign govt might require joint ownership as a condition for entry
Joint ownership has certain drawbacks. The partners might disagree over investment,
marketing or other policies. One partner might want to declare more dividends.

5) Direct Investment
The ultimate form of foreign involvement is direct ownership of foreign based assembly or
manufacturing facilities. The foreign company can buy part or full interest in a local company
or build its own facilities.

If the market appears large enough, foreign production facilities offer distinct advantages.

1. The firm secures cost economies in the form of cheaper labour or raw material etc.
2. The firm strengthen its image in the host country because it creates jobs.
3. The firm develops deeper relationship with govt, customer, local suppliers and distributors.
4. The firm retains full control over its investment.
The disadvantage of direct investment is that the firm exposes a large investment to risks such
as blocked or devalued currency, worsening markets etc.

INTERNATIONAL ECONOMIC ORGANISATIONS/INSTITUTIONS

A brief review of some international economic organisations is presented below. A detailed study
of each is outside the scope of this present book.

1. International Monetary Fund (IMF)

It was created as a result of an agreement reached by forty-four nations at Bretton Woods, U.S.A.
in 1944. It began full operations in 1947. Its headquarters is at Washington D.C., U.S.A. Most of
its members belong to the United Nations Organisation.
The need to establish this organisation arose from the difficulties posed by the world wars to
international trade and exchange rates. It was therefore set up mainly to create conditions which
are favourable for the growth of world trade. Member countries contribute to the fund party in
international currency (gold) and party in their local currencies, according to their quotas. The
institution therefore bas reserves of currency of different countries.

Functions or Objectives
(i) To maintain stability of foreign exchange rate: To achieve this, countries were asked
to declare the par value of their currencies in relation to other currencies. Initially,
countries were not allowed to devalue their currencies unless there was a chronic
balance of payment problem. Competitive devaluations were also not allowed.

18
(ii) Provision of Loans: It provides short-term loans to member countries to finance their
temporary balance of payment deficits. This is to prevent them from devaluing their
currencies unnecessarily. It assists countries to find ways of overcoming their balance
of payments difficulties.
(iii) Promotes free trade by encouraging the removal of artificial restrictions to free
flow of international trade: This is achieved by ensuring the free convertibility of
currencies. This and other measures help to facilitate payments for imports. In giving
out loan, it ensures that the country does not adopt a foreign exchange control policy
which impedes international trade.
(iv) Promotion of vital data for planning: Data from its surveys are made available to
countries for planning purposes thereby assisting in development efforts of different
countries.
(v) Provision of technical and financial advice: The fund helps to advice member
countries on how to overcome their internal economic problems.
(vi) The organization encourages co-operation among member countries on monetary
matters. They are encouraged to form Economic blocs or Economic unions.
Most of the functions of the IMF are relevant to West Africa.
(i) Some West African countries have obtained loans from the IMF to solve their balance
of payments problems.
(ii) It has helped many West African countries to obtain vital statistics requirement for
planning, through conducting country surveys.
Problems of the IMF
(i) The operations of the IMF pose some difficulties especially to the developing
countries: Many of the developing countries have not been able to cope with the
stringent conditionalities of the IMF for granting loans. The conditions sometimes
involve large- scale devaluation of currency, trade liberalization, mass retrenchment of
workers in the public service to cut down government costs, etc. These have had
adverse impacts on West African Countries.
(ii) Domination of the fund by a new country: Voting rights and credit entitlements of
member countries depend on their contributions quotas. The IMF’s decisions have
therefore been dominated by countries such as the U.S., the U.K., West Germany and
Japan. Many of the policies of the organization tend to favor them at the expense of the
poor nations who contribute very little to the Fund.
(iii) Inadequacy of International Reserves: Because of the growing balance of payments
difficulties for many countries, it has not been possible to cater for all countries
requiring loans. Also, in the sixties the declining confidence in the dollar (as an
international reserve currency) was brought about by the devaluation of the dollar
arising from the country’s balance of payments problems.
To solve the problem of inadequate international reserves, the IMF started issuing
Special Drawing Right (SDRs) in 1970. This is an international reserve asset created
by the IMF to supplement other international reserve assets and to ensure greater
international liquidity.

19
 In 1974 the Fund introduced a ‘Special Oil Facility’ which is meant to help member
countries settle their oil import bills, when in difficulty.

2. International Bank for Reconstruction and Development (IBRD)

This institution is popularly known as the World Bank. It was created in 1944 at the same time
with the IMF at Bretton Woods. Its headquarters is in Washington, USA. It was set up to help in
the reconstruction and development of war-ravaged economies. Member according to their
national income or level of development. The U.S.A and a few other developed nations contribute
the bulk of the capital.

Functions/Objectives of IBRD
(i) Provision of long-term loan for development: It make loans available to member
countries for the development of infrastructure and major capital projects. The loans
carry a moderate rate of interest and are for periods of about twenty-five years. The
money lent is from internal sources or borrowed from the money and capital markets
of different countries.
(ii) Provision of assistance in reconstruction: This was one its primary roles. It helps in
providing funds for the reconstruction and rehabilitation efforts of member countries.
(iii) Promotion of foreign private investments: Its sometimes does this by guaranteeing such
foreign investments and by going into partnership with the foreign investors.
(iv) Technical assistance: The bank has personnel which help to provide technical
assistance especially to the developing countries that require such assistance for
carrying out certain projects. They give expert advice on projects and help in
development planning.
Specialized Agencies of the World Bank
(i) International Development Association (IDA)
It is specialized in lending money only to the underdeveloped countries. It gives loans
for long periods which sometimes range from forty to fifty years, at very low interest
rates.
(ii) International Finance Corporation (IFC)
It is specialized in giving out loans to countries for the establishment of manufacturing
industries.
Importance of the World Bank to West Africa
The World Bank is widely known among the developing countries of the world. A lot of assistance
had been provided in a number of ways.
(i) Loans: It has provided loans of many countries of West Africa for the development of
agriculture, industry, power, supply, education, etc. Nigeria received a loan of about
N60 million to help in building the Kanji Dam. By 1980, World Bank loan to Nigeria
stood at $814 million.
(ii) Provision of technical assistance: A lot of technical assistance has been provided for
purposes of planning and implementation of projects requiring high level manpower.
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 (iii) Provision of basic data: The World Bank conducts studies of various countries. This
has led to the provision of basic information required for planning purposes.
3. African Development Bank (ADB)
This institution was set up in 1964 with its headquarters at Abidjan, Cote d’lvoire. It is a bank
owned by African countries which belong to the Organisation of African Unity. It was set up
following an agreement reached in a meeting of finance Ministers of some African countries. Both
the OAU and the Economic Commission for Africa (ECA) contributed in one way or the other to
its establishment. It started effective operations in 1966. Initially, twenty-three African countries
belonged to the organization. By 1970, membership had risen to thirty-one.

Functions/Objectives of the ADB

Its functions are similar to those of the World Bank, except that its operations are limited to Africa.
(i) It aids economic and social development through the provision of loans for the
financing of viable projects in member countries.
(ii) It helps to provide technical assistance for projects. Such assistance may be in the area
of conducting feasibility studies, financing and executing projects. The bank helps
member states to select priority projects which can be executed with available human
and material resources.
(iii) It helps to promote both private and public investment in projects which contribute to
the economic and social development of member states.
(iv) It fosters economic integration among member countries
Because of the limited resources of the ADB, it gives priority to projects which benefit
a number of member countries (that is, projects whose benefits it across national
boundaries) and those which generate employment opportunities for persons from
member states.
4. Organization of Petroleum Exporting Countries (OPEC)
It is a cartel of oil producing countries established in 1960. The five founding countries
were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The member countries are presently thirteen.
The ones that joined later are Nigeria, The United Arab Emirates (UAE), Algeria, Libya,
Indonesia, Qatar, Ecuador, and Gabon.

Objectives of OPEC/Roles OPEC

(i) The primary aim was to break the monopoly of foreign oil marketing companies and
have a more effective control over them. It is meant to enable the oil exporting countries
to have a greater say in the level of oil production in their territories by encouraging
establishment of refineries and petrochemical industries.
(ii) It helps in the stabilization of oil prices to the advantage of member states. This is
achieved by effective management of supply and by influencing demand.
(iii) It aims at achieving a fairly stable income from oil while at the same time ensures a
steady flow of oil to the consumers. The achievement of stable prices will lead to a
steady flow of income.

21
(iv) Fixing production quotas for member countries it determines the production levels or
quantity of crude oil to be produced by each member countries. This is one way of
preventing excess supply or oil glut.
(v) To co-ordinate and unify the petroleum policies of member countries OPEC
streamlines the oil policies of member countries in line with OPEC standards. Violation
of standards may be sanctioned.
(vi) To promote economic and scientific co-operation among members. It encourages co-
operation in areas of research, information and development technologies thereby
increasing the pace of development in these countries through joint efforts.
(vii) To reduce competition between member countries and increase the benefits accruing
to them through collective bargaining. Joint negotiations increase their bargaining
power in the world market, making them to have better deal for products.
(viii) To provide financial aid to member countries in need of assistance. Soft loans and
grants may be given to members to finance investments in the oil sector.
Achievements of OPEC
(i) It has set production quotas for various member countries in order to prevent excess oil
supply in the world market.
(ii) It has had a significant influence in stabilizing oil prices. The 1970s witnessed a high
price for oil due to the activities of OPEC.
(iii) It has contributed to the control of foreign oil companies operating in the territories of
member countries. The decisions arrived at OPEC have led to a new pattern of
relationship between the oil-producing countries and the foreign oil companies. They
no longer dominate the oil industry in these countries.
Problem of OPEC
1. Inability of the organization to control total world output and supply of oil. The share of
non-OPEC countries in the oil market has increased world oil glut may result from
excessive supply by non-OPEC countries despite production quotas fixed by OPEC.
2. Fluctuation or instability in world oil prices. The market price of crude oil has been largely
determined by the market forces of demand and supply rather than by price fixing. Constant
fluctuation makes economic planning and projections difficult.
3. Sabotaging the efforts of OPEC by some advanced countries. There has been a declining
world demand for oil caused by the energy conservation policies and use of non-oil energy
sources by advanced countries, thereby weakening OPEC.
4. Political disagreement between member nations. Disagreements on the political front have
jeopardized the relationship between members and agreements made e.g. Iraq and Iran are
constantly at war.
5. Violation of quotes by some countries. Some members have not always been honest among
them and have sometimes raised production level above the agreed quotas in order to raise
more foreign exchange to solve their economics problems.
6. Divergence of interests, problems and needs of member countries. The member nations
have different needs or interest which may jeopardize common interests.

Industrialization in West Africa

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Definition: Industrialization can be defined as the process of transforming an economy based on
extractive activities into one based on manufacturing. In other words, industrialization refers to the
process by which an economy based on agriculture, fishing, lumbering, mining, etc. Is transformed
into one based on industries. Industrialization require the establishment of many firms which are
capable of producing goods and service.

Role of Industrialization in Economic Development of a Nation

Industrialisation or the industrial sector contributes greatly to the economic development of nations
in the following ways.

I. Increase in gross national product (GNP): The industrial sector, through. Its operation
like payment of taxes, increases the earnings accruable to the nation.
II. Employment opportunities: Industries provide employment (jobs) for many people.
III. International trade: improve trade balance: Most of the products of manufacturing
industries like machinery are usually imported from Western nations. This form the basis
for international trade and improve trade balance between countries.
IV. Stimulation of other sector: The industrial sector stimulates the growth of other sector
like agriculture, mining, lumbering, etc.
V. Control of inflation due to mass product: with modern technology, products like car,
machinery, etc. can be mass produced. This can help to reduce inflation.
VI. Technological development: Industrialisation can also led to the development of
technology in the country.
VII. Infrastructural development: The establishment of an industry in place stimulates the
development of infrastructural facilities like roads, telephone, electricity, pipe borne
water, etc.
VIII. Diversification of the economy: The industrial sector helps different countries to prevent
over- dependence on only one product, like Nigeria’s present over- dependence on crude
oil. If Nigeria can invest in the industrial sector, her economy will in time be diversified.
IX. Training and development of skilled manpower: Many people are trained in different
technical areas in order to acquire special skills to manage different aspects or machines
in an industry. Owing to industrial development, many people are given such skill
training.

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 X. Funding of education and research: The industrial sector provides capital for the
funding of education and research work in all nations, e.g. the Education Tax Fund (ETF)
in Nigeria.
XI. Conservation of foreign exchange: Industrialisation has led to the conservation of
foreign exchange which would have been used for importing goods now produced locally.
XII. Improving standard of living: Industrialisation also lead to the improvement or raising
of the standard of living of the people through production of goods that are cheap and
affordable.

1. Problems of Industrialisation or Industrial Growth in west Africa

The following factors hinder, limit or are responsible for the relatively low level of industrial
growth and development in West Africa.

I. Shortage of raw materials: Lacks of sufficient raw materials available to industries

hinders large scale production.
II. Insufficient capital: Access to finance or loan is very difficult and this tends to limit
industrial development.
III. High degree of foreign dependence: Most products made West Africa are of low quality
when compared with those in developed countries. Hence, people prefer or depend on
foreign goods.
IV. Poor quality of industrial labour: West Africa has a large pool of illiterate population
that provides the personnel for our industries. This affects efficiency and quality of
product.
V. Low purchasing power of the populace: Large scale poverty in West African countries
makes people to have low purchasing power.
VI. Inadequate power supply: There are frequent disruptions of power supply in industrial
areas and many areas do not even have power supply.
VII. Competition with foreign goods: Because of the high quality of foreign goods, goods
produced by our local industries are usually not patronized.

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VIII. Shortage of entrepreneurs: Owing to lack of capital, loan facilities and other factors,
reliable investors are not common.
IX. Poor management: Corruption, embezzlement and negligence of duty are very common
in West African countries and these are indicators of poor management.
X. Political instability: Frequent changes in government and incessant civil wars in West
African discourage foreign investors.
XI. Inadequate transport and communication facilities: Transportation network like roads,
railways, etc. and communication facilities are grossly inadequate in West Africa.
XII. Small market for industrial goods: West African countries do not have large enough
markets that can accommodate industrial goods produced.
XIII. Inadequate skilled man-power: Skilled man-power required for high industrial growth
is grossly inadequate in developing countries.
XIV. Bad government policies: Certain government policies towards industrialization are bad
and do not encourage industrial growth.

2. Solutions to the Problems of Industrial Development in West Africa.

i. Acquisition of skill: Skill required for industrial operations should be acquired by
people through regular training.
ii. Good government policies: There should be good government policies to encourage
and protect local industries.
iii. Active government participation: There should be active government participation
in industrial development, i.e. co-ownership of industries.
iv. Incentives to local industries: There should be incentives to local industries, e.g. tax
holiday, interest-free loans, subsidies etc.
v. Provision of transport and communication facilities: These should be provided to
ensure easy distribution of goods produced.
vi. Creation of industrial zones: This will also provide a conducive environment with all
the infrastructural facilities for the establishment.
vii. Establishment of industrial banks: Industrial and other development banks should
be set up provide loans to industrialists.

25
 viii. Stable government: There should be stable government in order to attract foreign
investors.
ix. Local sourcing of raw materials: there should be exploitation of raw materials locally
for industries.
x. Organization of management courses: Management courses should be organized on
regular basis for workers.
xi. Building and maintenance of infrastructural facilities: Infrastructural facilities such
as roads, telephones, water, electricity, etc should be built and maintained regularly.
xii. Establishment of more power plants: Plants such as thermal or hydroelectricity
plants should be established to boost power supply to industries.

3. Ways or Methods by which Government can Encourage Industrialization in Nigeria.

The federal government has adopted the following ways or methods of encouraging
industrialization in Nigeria.

I. Tax concessions to pioneer industries: the federal government gives tax concession to
pioneer industries for a specified number of years during which the industry will not pay
tax.
II. Protection of infant industries: The government protects infant industries through high
import duties, outright an or placement of quotas on imported commodities which compete
with those of home industries.
III. Development of infrastructural facilities: Government has also embarked on the
construction of better road networks, especially the express roads, efficient
telecommunications, electricity and water supply system.
IV. Establishment of industrial estates: The government should also establish industrial
estates and thus reduce the problem of locating industries in urban areas.
V. Establishment of Nigerian Enterprises Promotion Decree: The Nigerian Enterprises
Promotion Decree of 1972 was set up by the Federal military Government in an attempt to
transfer part of the profits generated in Nigeria to the local people.

26
 VI. Establishment of financial institution: The government has established financial
institution to id private enterprises, e.g. Nigerian Bank for Commerce and Industry and
Nigerian Industrial Bank.
VII. Establishment of higher institutions: the government has also established universities
and college of technology with the aim of developing human resource.
VIII. Relaxation of industrial laws: Government should also contribute towards
industrialization by relaxing some industrial of import control by the government. E.g. the
importation of machinery and raw materials.
IX. Increased industrial loans: An increase in industrial loan will enable more business men
to obtain loans and established more industries.
X. Initiation of industrial loans: Government can equally initiate certain industrial policies
such as privatization and commercialist to boost industrial development.
XI. Improvement in agriculture: Government has also ensured that there is improvement in
agriculture to increase the supply of food and raw materials

4. Strategies of Industrialization

Many strategies have been adopted by the government aimed at achieving industrial development
in Nigeria. These strategies include.

i. Import-substitution strategy: The import-substitution strategy involves deliberate

attempt by government aimed at encouraging the growth of industries within the
country which produce goods and service which would otherwise have been imported.
ii. Export promotion strategy: Export promotion strategy is also a deliberate
government policy aimed at encouraging the production of commodities for export.
Government can do this through the granting of tax concessions, reducing export duty,
finding a realistic exchange rate, providing assistance on export costing and pricing,
organization of trade fairs to expose home-made goods to other countries, etc.
iii. Small scale and large scale development strategy: Government can also encourage
the development of small and large-scale industries with aim of developing the
industrial sector of the economy. The small-scale industries under the “small scale

27
 industrial in rural areas in order to provide employment to the rural people and prevent
rural -urban migration.

5. How West African Countries Promote Indigenous Industries.

West African countries can promote indigenous industries by:

i. Greater reliance on domestic raw materials: West African countries should have a
greater reliance in sourcing domestic raw materials for their industries.
ii. Research and application of research result: They should also embark on intensive
research works and the results should be applied for industrial growth.
iii. Availability of finance; Finance or capital should be made available for indigenous
industrial promoters.
iv. Development of skills: there should be more development of entrepreneurial and
management skills for efficient industrial development.
v. Political Stability: There should be relative political stability to ensure continuous
growth of industries.
vi. Better work attitude: Labour or workers should put on a better work attitude aimed
at achieving better result.
vii. Development and expansion of market: There should be proper development and
expansion of market for locally made products.
viii. High level of productivity: There should be a high level of productivity that will lead
to higher level of savings and greater capital formation.
ix. Improved social and economic infrastructure: There should be improved social and
economic infrastructure, e.g. electricity, seaport, airport, telecommunication, etc. such
that can boost industrial growth.
x. An enabling environment: A legal, social and cultural environment that not only
enables but also motivates indigenous industries must be put in place.
6. Reasons for the Concentration of Industries in Urban Centres.

Reason why many industries are located or concentrated in Urban centres (cities and towns)
include:

28
 i. Large market: the presence of high population in urban centres provide a wide market
for industrial products.
ii. Availability of labour: The high population also provide both skilled and unskilled
labour for the industries.
iii. Good transportation network: Urban centres are provided with well developed
transport network like roads, railways, airport, etc.
iv. Nearness to seaport and airports: This also contributes to the siting of industries in
urban centres.
v. Availability of finance: Easy access to loans from banks located in cities also
contributes to the concentration of industries in the cities.
vi. Presence of infrastructural facilities: The presence of electricity, pipe borne water,
telephone, etc. also contribute to the concentration of industries in urban centres.
7. Reasons for siting Industries in Rural Areas in Nigeria.
i. Development of rural areas: The siting of industries will lead to the development of
rural areas.
ii. To discourage rural urban migration: When industries are located in rural areas, it
will go a long way in discouraging the movement of people from rural areas to urban
areas.
iii. Provision of employment: Industries so established in rural areas will provide
employment for skilled and unskilled labour in rural areas.
iv. Increased production of goods: Industries that are located in rural areas will increase
the availability of goods to the rural populace.
v. Increased earnings for rural people: The rural people so employed in industries are
able to earn more salaries from the places of work.
vi. Encourage urban-rural immigration: The siting of industries in rural areas will also
attract the movement of people from the cities t the rural areas, thereby decongesting
the cities.

Definition of Inflation

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Inflation may be defined as a persistent rise in the general price level of goods

and services. Inflation occurs when the volume of purchases is permanently running ahead

of production and too much money in circulation chasing too few goods .

Types of Inflation

THERE ARE THREE MAIN TYPES OF INFLATION. THESE ARE

1. DEMAND- PULL INFLATION:

Demand-Pull inflation occurs when consumer have high purchasing power leading to

increases in aggregate demand without a corresponding increase in supply . In other words,

this inflation occurs when the demand for goods and services is greater than their supply .

THE factors responsible for this type of inflation may be due to population increase , in

workers’ salaries and wages.

2. COST-PUSH INFLATION:

Cost- push inflation occurs when increases in cost of production are passed on to consumers in

the form of high prices for the goods and services on sale. The prices of goods and services are

pushed up by rising costs.

3. HYPER-INFLATION:

Hyper-Inflation, also known as galloping or run-away inflation, occurs when a persistent inflation

becomes uncontrollable and the value of money keeps declining rapidly. Prices of goods and

services rise at a fast rate leading to money losing its value or its ability to buy goods. War, budget

deficits, etc. are the major causes of hyper –inflation.

30
 4. PERSISTENT OR CREEPING INFLATION:

Persistent or creeping inflation, also known as chronic inflation, occurs when there is a slow

but steady rise in the volume of purchasing power and a fall in supply of goods and services.

In other words when inflation involves a slow but steady rise in the general prices of goods

and service, it has known as creeping inflation.

CAUSES OF INFLATION

1. Increase in Demand: When the demand for goods and service is greater than supply this

results in inflation (demand –pull inflation).

2. Low Production: Low production of goods and service can lead to their scarcity and when

supply cannot meet up with high demand, inflation set in.

3. War: War is a major causes of inflation as people no longer produce, resulting in high

volume of money pursuing fewer goods.

4. Increase in salaries and Wages: When salaries and wages are increased, without

corresponding increase in supply of goods and services, it can lead to excess money in

circulation chasing few goods.

5. High cost of production: When there is high cost of production, manufactures build in

this high cost into the cost per unit and pass it to the consumers leading to cost-pull

inflation.

6. Budget Deficit: When government expenditure is more than its income, it results in budget

deficit and this leads to inflation.

7. Population Increase: A sudden rise in the population for goods and service and if there is

no corresponding rise in supply, it will result in inflation

31
 8. Excessive bank lending: This can lead to excessive money in circulation chasing few

goods and service

9. Level of importation: High cost of importing raw materials can lead to high cost of goods,

which passed to consumers leading to cost-pull inflation.

10. Hoarding: Hoarding, which is the act of creating artificial scarcity of goods, can lead to

inflation.

11. Inadequate storage facilities: When goods produced cannot be stored, for future use, it

can lead to scarcity resulting in inflation

12. Industrial Strike: Prolonged strike can causes scarcity of goods and service leading to

inflation.

13. Money laundering: Mass transfer and injection of money into circulation can also cause

inflation.

EFFECTS OF INFLATION

Inflation has both positive and negative effects:

 The positive effects of inflation

1. Reduction in burden of debt: During inflation, debtors gain because there is too much

money in circulation, which will enable them to pay their debts with ease.

2. Higher profit margin: Because producers are selling their goods at higher prices, this will

lead to higher profits

3. Higher tax yield: As a result of high volume of money in circulation, government is able

to realize high yield from taxes.

32
 4. Higher output: Higher prices of goods and service during in greater output.

 The Negative Effect of Inflation

5. It discourages savings: During inflation , people spend more money leading to

low or no saving.

6. Increase in interest rate: The rate at which banks give loan to customer increases

during inflation.

7. Creditors lose: The value of money received is far less than the value of money lent out.

8. Loss of value of money: Money loses its value generally during the period of inflation

9. Fall in standard of living: Inflation brings lots of problems to salary earners as they spend

it on costly goods and service leading to a leading to a falling standard of living.

10. It discourages investment: low value of money coupled with little or no savings

discourages investments.

11. Balance of payment problems: Inflations causes balance of payment problems since

foreigners will want to sell to and also do minimal buying from countries with inflationary

trend.

12. It discourage exports High prices during inflation discourage exports since such countries

will be high-cost producers.

CONTROL OF INFLATION

1. Use of contractionary monetary measures: The use of contractionary monetary measures

such as increase in bank rate, open market operation, deposit ratio and moral persuasion

can help to control inflation.

2. Use of fiscal measures: Inflation can also be controlled with the use of fiscal measures to

reduce the amount of money in circulation e.g. increase in direct taxation.

33
3. Effective price control system Inflation can also be controlled through the use of effective

price control system e.g. price control board by government official and the application

of rationing to maintain price level.

4. Reduction in government expenditure or surplus budget: The government should

reduce expenditure and it will go a long way towards reducing the amount of money in

circulation.

5. Industrialization: industrialization will reduce over reliance on imported goods and

bring about increase in output which will reduce prices

6. Checking the activities of hoarders: The activities of hoarders should be checked to

prevent increase in prices of goods .

7. Increased production: inflation can be controlled by increasing production or output in

order to bring down the prices of goods.

8. Granting of subsidy to enterprises: Inflation can also be controlled by granting subsidy

to enterprises and companies producing essential products to reduce cost of production and

the products prices.

9. Removal of bottlenecks in the distribution system: Removing bottlenecks in the

distributing system i.e. provision of good roads, storage facilities etc is another means of

controlling inflation.

10. Discouragement of Importation: Government should discourage importation from

countries already experiencing inflation, as a way of controlling it.

11. Use of income policies: Use of income policies such as wage freeze, delay in promotions,

etc. is equally a way of controlling inflation.

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Definition: Deflation may be defined as a continuous fall in the price level of goods and service as

a result of decreases in the volume of money in circulation. Since prices fall, the value of money

rises during deflation. A given sum of money can purchase more goods and service. It should be

noted that deflation is the opposite of inflation.

CAUSES OF DEFLATION

1. Budget surplus: Budget surplus serves as a device by which the rate of injecting

money in to circulation was reduced.

2. Increase in bank rate: This serves to discourage commercial banks from borrowing

from the central bank and by so doing reduces the bank’s ability to lend money,

leading to a reduction in the volume in circulation

3. Increase in production: increase in production of goods without corresponding

increase in the volume of money in circulation can lead to deflation.

4. Increase in taxation: when taxation is increased, it will definitely reduce the volume

of money in circulation thereby causing deflation to occur.

EFFECT OF DEFLATION

1. Decline in profits: Deflation causes a decline in profits as a result of low volume of money

in circulation

2. It results in unemployment: Deflation brings about unemployment in the labour market.

3. Fall in prices of goods: As a result of decline in the volume of money in circulation, the

prices of goods and services tend to fall.

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 4. Reduction in investment: As a result of low savings, the level of investment tends to be

reduced.

5. Creditors Gain: Creditors gain because money has added value during period of deflation.

6. It encourage exports: Goods that are to be exported are generally very cheap during

deflation.

7. It discourage imports: Goods imported are generally more expensive and there is no hope

of selling such goods in an economy that is experiencing deflation.

8. Fixed income earners gain: During the period of deflation, fixed income earners gain

because the wages are fixed and they are able to buy more goods and services.

9. Increase in the value of money: There is increase in the value of money due to the fact

that is supply is lower than its demand.

10. It encourages savings: Savings is encouraged because the value of money increases

during deflation.

CONTROL OF DEFLATION

1. Reduction in taxation: This practice enables people to have more money thereby

increasing their purchasing power and controlling deflation.

2. Use of deficit budgeting: An increase in government expenditure helps to inject more

money into circulation by curbing the effects of deflation.

3. Reduction in bank rate: This will assist investors to borrow more money from banks

thereby increasing the volume of money in circulation.

4. Increase in wages and salaries: This will help to inject more money into circulation

thereby controlling deflation.

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5. Use of open market operation: The Central Bank does this by purchasing securities from

commercial bank. This make it possible for the commercial banks to be able to lend money

out and increase the volume of money in circulation.

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