3RD TERM LESSON NOTE FOR SS2 ON ECONOMICS

WEEK ONE
ELEMENTARY TREATMENT OF FISCAL POLICY
MEANING OF FISCAL POLICY
Fiscal policy refers to the government plan of action concerning the raising of
revenue through taxation and other means and the pattern of expenditure to be
applied. Some of the fiscal policies of government are incorporated in the
budget so as to help in directing economic activities in the country.
PUBLIC FINANCE
Public finance may be defined as that branch of economics which deals with the
financial activities of government concerning revenue, expenditure and debt
operations and their effects on the economy.
OBJECTIVES AND FUNCTIONS OF PUBLIC FINANCE
1. Revenue generation
2. Improved balanced of payment
3. Price stabilization
4. Equitable distribution of income
5. Good fiscal policy
6. Provision of employment
7. Satisfaction of needs
OBJECTIVES OF FISCAL POLICIES
1. Economic development
2. Revenue generation
3. Creation of employment
4. Industrial development
5. Income redistribution
6. Increased productivity
7. Control of inflation
GOVERNMENT OR PUBLIC REVENUE
Public revenue refers to the total income that accrue to the government of a
country from various sources. Government needs enough revenue in order to
enable it carry out its numerous functions. Public revenue includes capital
revenue and recurrent revenue.
TYPES OF PUBLIC REVENUE
1. Capital revenue or receipts : This is also called irregular or extraordinary
sources of revenue are sources of revenue used for meeting expenditure
on heavy capital projects.
2. Recurrent revenue: recurrent revenue is a regular source of revenue in
which income is received on a regular or yearly basis e.g taxation, fees and
licences, fines and interest on loans.
SOURCES OF GOVERNMENT REVENUE
Government generates income through the ways listed below:
1. Taxes
2. Loans
3. Grants and aids
4. Government investment
5. Licences
6. Savings
7. Rents and rates
8. Fees, fines and royalties
9. Miscellaneous sources
PUBLIC OR GOVERNMENT EXPENDITURE
Government expenditure refers to total expenses incurred by public authorities
at the federal, state and local government levels. There are many avenues by
which government or public authorities incure expenses. It includes recurrent
expenses and capital expenses.
TYPES OF GOVERNMENT EXPENDITURE
1. Capital expenditures: These are expenses on projects which are
permanent in nature like building roads, schools, bridges, hospitals,
industries etc.
2. Recurrent expenditure: These are those expenses which are repeated on
yearly or regular basis which include payment of salaries, electricity bills
and maintenance of infrastructures.
REVENUE ALLOCATION
Revenue allocation can be described as a method of sharing the centrally
generated revenue among the three tiers of government. The formular allocates
52.68% to the federal government, 26.72% to the state government and 20.60%
to the local government.
From the share of the states are further subdivided between all state on the
basis of equality of states 40%, population 40% primary school enrollment 15%,
social development factor and ratio of internal revenue effort to total recurrent
expenditure 5%, 3.5% for payment of mineral producing states and 1% for
dealing with ecological problems.

WEEK 2
TAXATION
Taxation may be defined as an act or method of imposing a compulsory levy by
the government it its agencies on individuals and firms or on goods and services.

FEATURES OR CHARACTERISTICS OF TAX

1. Tax is a compulsory payment
2. The money realized from tax is for the welfare of the people
3. Tax is levied by government or its agency
4. People must attain certain age before they start paying tax
5. Tax is a payment made as a sacrifice
PRINCIPLES OF A GOOD TAX
Principles or cannons of good tax system according to Adam Smith in Wealth of
the Nation include:
1. Equity or ability to pay
2. Economy
3. Convenience
4. Certainty
5. Revenue yield
6. Neutrality
7. Benefit-received principle
8. Flexibility
 9. Simplicity
TYPES OR FORMS OF TAX
The two major types of tax are as follows:
1. Direct tax
2. Indirect tax
DIRECT TAX
Direct tax is the form of tax imposed directly on the income of the individual or
organization by the government or it agency. Such income include wages,
salaries, profits, rents and interest. The burden of direct tax is borne or rested
on the payers.
TYPES OF DIRECT TAX
1. Personal income tax
2. Company tax
3. Poll tax
4. Capital tax or property tax
5. Capital gain tax
6. Expenditure tax
ADVANTAGES OF DIRECT TAX
1. Direct tax is progressive in nature
2. They are used to control inflation
3. The incidence of tax is easy to ascertain
4. They discourage cheating
5. They are easy to calculate
6. They are used in distributing income
7. Payers find them convenient to pay
8. Government total revenue from tax can be estimated
9. They arouse civil consciousness
DISADVANTAGES OF DIRECT TAX
1. They reduce saving
2. They discourage investment
3. They reduce purchasing power
4. They are inconvenient
 5. Difficulty in proper assessment
6. Disincentive to hard work
7. They are prone to evasion
8. They bring about personal squabble
INDIRECT TAX
These are taxes levied on locally made, imported and exported goods and
services. The producers or sellers bear the initial burden of tax before shifting
them to the final consumers in the form of higher prices.
TYPES OF INDIRECT TAXES
1. Custom duties of tariffs: this are grouped into two:
a. Import duties
b. Export duties
2. Excise duties: These are taxes levied on certain goods produced locally.
3. Sales tax: This tax is levied on the sale of certain commodities.
4. Purchase tax: This type of tax is levied on luxury goods.
5. Valued added tax (NAT): This is the type of tax imposed on goods and
services at every stage of production. The burden is finally borne by final
consumers.
CLASSIFICATION OF INDIRECT TAX
1. AD valorem tax: This form of indirect tax is imposed on commodities in
accordance with their respective values and at specific percentage of tax.
Luxury goods attract high percentage of tax than essential goods.
2. Specific tax: This type of indirect tax where a fixed sum is imposed or
levied per unit of a commodity irrespective of the value. That is, equal
percentage of tax is levied on both luxury and essential commodities.
INCIDENCE OF TAX
Incidence of taxation refers to the point at which the tax burden finally rests.
The burden of tax refers to the amount paid as tax. The incidence or burden of
tax lies on the person who finally pays the tax.
TYPES OF INCIDENCE OF TAX
1. Formal incidence: this refers to the initial effects of tax on the tax payer.
That is, where the initial burden of taxation lies.
 2. Effective incidence: This makes reference to who bears the final burden of
taxation. The payer bears the initial and final burden of taxation in indirect
tax.
i. Incidence of indirect tax when demand is perfectly inelastic.
ii. Incidence of indirect tax when demand is perfectly elastic.
iii. Incidence of indirect tax when demand is moderately elastic or
inelastic.
iv. Incidence of indirect tax when demand is unitary.
PROGRESSIVE TAX
progressive tax is a form of tax in which the rate of tax increases as the income,
stock of wealth or value of property to be taxed increases. This income tax is
also known as PAY AS YOU EARN (PAYE).
This is illustrated graphically in the class.
REGRESSIVE TAX
This is a tax system where the tax rate decreases as income increases. The
higher the income of a consumer, the lower the rate of tax. In regressive tax, a
poor person pays higher proportion of his income than a rich person. Example is
poll tax. This is illustrated graphically in the class.
PROPORTIONAL TAX
This is a form of tax in which the rate of tax is the same irrespective of the level
of income or wealth of the payer. The payers pay the same percentage or
proportion of their income as tax. Example is company tax in which companies
are required to pay a fixed percentage of their profits as tax.
TAX EVASION
Tax evasion is an illegal means of not paying tax. It is also concealing income of
information from tax authorities. It is the use of deception, dishonesty,
concealment to escape paying proper taxes. This is an illegal activity in which a
person or entity deliberately avoids paying a true tax liability.
TAX AVOIDANCE
Tax avoidance is the use of legal methods to reduce the amount of income tax
that an individual or business owes.
TAX BASE
Tax base refers to the item or object which is taxed.
TAX RATE
Tax rate refers to the percentage or proportion of tax objects which is to be paid
as tax.
WEEK 3 AND WEEK 4
BUDGET
A budge is a financial statement of the total estimated revenue and the
proposed expenditure of a government in a given period of time usually a year.
TYPES OF BUDGET
1. BALANCED BUDGET: This is when the total estimated revenue is equal to
the proposed expenditure of the government. This means that nothing will
be left as reserve from the money collected in form of revenue. When
inflows are equal to outflows.
REASONS FOR BALANCED BUDGET
1. Balanced budget prevents gigantic debt burdens
2. It helps to control expenditure
3. It aids or increases savings
4. It prevents financial insecurity
5. Reduction in interest payment on loans
6. It helps to curb excessive borrowing
2. SURPLUS BUDGET: A budget is called surplus when the total estimated
revenue is more than the proposed expenditure. In this type of budget,
not all estimated revenue is proposed to be spent in that year. There will
be reserve.
3. DEFICIT BUDGET: A deficit budget is when the governments total
proposed expenditure for a period is more than total estimated revenue.
When Is has to do with federal government spending, a budget deficit
is also known as the “national debt”.
WAYS OF FINANCING DEFICIT BUDGET
1. By country’s bond: This is the government way of printing money to out-
weighs the demand.
2. Through public loans made by government
 EFFECTS OF FINANCING DEFICIT BUDGETS
1. Increasing level of prices
2. It causes a decrease in the purchasing power of people
3. It causes inflation
4. It causes depreciation of currency
5. It leads to decrease in social and economic life
6. It encourages importation of goods

TERMS ASSOCIATED WITH BUDGET

1. Debt servicing: This refers to the payment of interest on loans taken by the
government and the payment of the capital sum at a future date.
2. Debt management: This refers to a process or situation whereby the
government structures the country’s debts which are dominated in foreign
currency with the financial aim of reducing the total external debt stock.
3. Debt burden: A debt burden is a large amount of money that one
country or organization owes to another and which they find very
difficult to repay.
4. Debt relieve: It involve wipe the debt altogether in bank rupcy or
persuading creditors to agree to accept less than the full amount owed.
5. Debt buy—back: The process where either a borrower or its party
purchases the borrowers debt from its lender and usually at a discount to
par value.
WEEK 5 AND WEEK 6
ELEMENTS OF NATIONAL INCOME ACCOUNTING
NATIONAL INCOME ACCOUNTING
National income accounting may be defined as the means of determining the
money value of the total volume of goods and services produced or the total
income earned in or given country over a period of time usually a year.
The total income earned in a given country refers to the combination of
income of individuals, business organizations and the government.
NATIONAL INCOME CONCEPTS OR COMPONENTS
1. Gross domestic product (GDP)
2. Gross national product (GNP)
 3. Net national product (NNP)
4. National income (NI)
5. Personal income
6. Per capital income
7. Real income
8. Disposable income
GROSS DOMESTIC PRODUCT
Gross domestic product may be defined as the total money value of all goods
and services produced in a country at a particular period of time excluding net
income from abroad. G.D.P is used to measure the rate of growth of an
economy.
GROSS NATIONAL PRODUCT
Gross national product may be defined as the total money value of all the goods
and services produced in a country in a year plus the net income from abroad.
G.N.P = G.D.P. + Net income from abroad.
NET NATIONAL PRODUCT
Net national product is the gross national product minus the estimated amount
of depreciation of capital consumed during the year. Mathematically, G.N.P –
depreciation.
NATIONAL INCOME
National income may be defined as the money value of the total volume of
goods and services produced or the total income earned in a given country over
a period of time usually a year after allowanced has been made for capital
consumption.
PERSONAL INCOME
Personal income may be defined as the income or amount of money received by
individuals or households over a given period of time.
PER CAPITAL INCOME
Income per capital may be defined as the average income of the individual in a
given period of time usually a year. Per capital income can be obtained by
dividing the national income by the population of a country in that year. It
serves as an economic indicator of the level of standard of living and
development.
REAL INCOME
Real income may be defined as money in terms of goods and services it will buy.
Real income is the national income expressed in terms of general level of prices.
DISPOSABLE INCOME
Disposable income may be defined as the income or amount of money left to an
individual or household for spending and savings after the deduction of
personal income tax.
FACTORS THAT DETERMINE THE NATIONAL INCOME OF A COUNTRY
1. Availability of natural resources
2. Levels of technology
3. Industrial development
4. Working population
5. Economic situation
6. Nature of factors of production
7. Political situation
METHODS OF MEASURING NATIONAL INCOME OF A COUNTRY
1. Income method
2. Output method
3. Expenditure method
INCOME METHOD
This is obtained by adding incomes received by all the factors of production.
However, in order to avoid double counting, transfer of payment such as
payment to old people, beggars etc are not included. The income which is
included must be that which arises from the production of goods and services.
OUTPUT METHOD
This method measures the total monetary value of all goods and services
produced in the country in year. In order to avoid double counting, the figures
are collected on the basis of value added. Value added is the value of output
minus cost of input. Output method is also called net product or value-added
method.
 EXPENDITURE METHOD
This approach calculates the total amount spent on consumption and
investment purposes during the year. It measures the total expenditure on
currently produced final goods and services by individuals, households, firms
and government plus net export.
FORMULAR FOR CALCULATION NATIONAL INCOME USING
EXPENDITURE APPROACH
N.I = C + 1 + G + X – M = Subsides - Taxes – depreciation
N.I = national income
C = private consumption expenditure
I = private investment expenditure
G = government expenditure
X = export
M = import
USES OF NATIONAL INCOME
1. For economic planning
2. It attracts foreign investors
3. For assessment of economic performance
4. Measurement of standard of living
5. Redistribution of income
6. Index for classification
7. Estimation of assets and liabilities
8. Contribution of a nation into international organization
9. For future forecast
10. Basis of supply of technical aids to needy countries.
LIMITATIONS OF THE USEFULNESS OF NATIONAL INCOME STATISTICS
1. Differences in method of computation
2. Differences in structure of production
3. It does not reveal income distribution
4. Changes in population
5. Differences in the internal values of money
 6. Differences in priorities
7. Changes in the value of money
8. Differences in national needs
REASONS FOR MEASURING NATIONAL INCOME
1. It show the standard of living
2. It determines the growth rate of the economy
3. Contribution to international organization
4. For comparing standard of living with other countries
5. For economic policies and planning
6. It gives pattern of expenditure of households
7. Performance of the various sectors of the economy
PROBLEMS OF COMPUTING NATIONAL INCOME
1. Insufficient technical experts
2. Problem of double counting
3. Subsistence production
4. Problem of inflation
5. Inability to quantity some valuation
6. Difficulties in estimating net valuation
7. Improper valuation of depreciation
8. Ignorance and illiteracy
9. Incomplete information
10. Illegal transactions
WEEK 7 AND WEEK 8
TYPES OF FINANCIAL INSTITUTIONS AND THEIR FUNCTIONS
1. Traditional financial institutions
2. Money market
3. Capital market
TRADITIONAL FINANCIAL INSTITUTIONS
This involves the coming together of a group of people with common interest in
the same place of works or community who mutually agree to pool their
resources together in order to save, lend and manage money.
This traditional financial institutions usually take the form of co- operative
societies known as credit and thrift co- operative societies which are given
different names in different places E.G “ESUSU” OR “NSUSU” in Yoruba
“ETIOUTO” in Igbo.
FUNCTIONS OF TRADITIONAL FINANCIAL INSTITUTIONS
1. It encourages savings
2. It assists members to borrow
3. It assists members in times of need
4. It ensures proper management of funds
5. It promotes Investment
MONEY MARKET
A money market may be defined as a market for lending and borrowing of
short—term loans. This type of market aids all forms of business transactions.
The market consist of institutions or individuals who either have money to lend
or borrow on a short term basis.
INSTITUTIONS INVOLVED IN MONEY MARKET
1. The central bank
2. Commercial banks
3. Discount houses
4. Acceptance houses
5. Insurance companies
6. Finance houses
INSTRUMENTS USED IN THE MONEY MARKET
1. Treasure bills: This is normally used by the central bank which consist
government to borrow money from money market on short term basis.
2. Bill of exchange (BOE): This refers to a promisery note which shows the
acknowledgement of indebtedness by a debtor to his creditor and his
intention to pay the debt on demand or at an agreed time.
3. Call money fund: This is a special agreement or arrangement in which the
participating institutions invest surplus money for their immediate
requirement. It has an advantage of early return and at the same time are
withdrawable on demand.
ADVANTAGES OF MONEY MARKET
1. Provision of finance (money)
2. Creation of extra income
3. Promotion of economic development
 4. Ability to recall invested fund
5. It enhances savings
CAPITAL MARKET
A capital market may be defined as a market for the lending and borrowing of
long—term loans. The money lends and borrowed in this type of market is used
to finance capital projects. The capital market serves the needs of industry and
the commercial sector.
INSTITUTIONS INVOLVED IN CAPITAL MARKET
1. The central bank
2. Development banks
3. Building societies
4. National provident fund (NPF)
5. Insurance companies
6. The stock exchange
7. Issuing houses
INSTRUMENTS USED IN CAPITAL MARKET
1. Stocks
2. Shares
ADVANTAGES OF CAPITAL MARKET
1. It provides long—term loan
2. It mobilizes savings
3. It helps the growth of merchant banks
4. It encourages running of the economy
OTHER AGENCIES THAT CAN ACCESS THE CAPITAL MARKET
Central security clearing system (CSCS): CSCS is one of the arms of the Nigeria
stock exchange market. It is an independent organization which performs the
clearing and settlement of transactions for the stock exchange.
FUNCTIONS OF THE CENTRAL SECURITY CLEARING SYSTEM(CSCS)
1. It ensures clearing and settlement of transaction
2. It helps to keep financial instruments
3. It is a central depository certificate
4. It acts as sub-registry of all companies
5. It issues central securities identification numbers to stock brokers and
investors
 PRIMARY MARKET
This is the market for new long-term capital. The primary market is the market
where the securities are sold for the first time. It is therefore called New issue
market (NIM). Securities are issued by the company directly to investors in the
primary issue. The company receives the money and issue new security
certificate to the investors. The primary issues are used by the companies for
setting up new business, expanding or mobilizing the existing business.
METHODS OF ISSUING SECURITIES IN THE PRIMARY MARKET
1. Initial offering
2. Right issue for existing companies
3. Preferential issue
SECONDARY MARKET
The secondary market is a financial market for trading of securities that have
already been issued in an initial private or public offering. This is a market for
any kind of used goods.
SECURITY
Securities are financial instruments which are traded on the stock exchange
market. Examples of securities are
1. Shares
2. Stocks
3. Debentures
4. Bonds
STOCK EXCHANGE MARKET
A Stock exchange market may be defined as a market where shares, stocks, and
other securities are bought and sold. Before. They must be approved by the
stock exchange council which is the government body of the stock exchange.
Only existing stocks and shares are sold and bought in stock exchange markets.
Therefore, new ones are sold and bought through agents known as brokers and
jobbers who earn commission for the service rendered.
FUNCTIONS OF THE STOCK EXCHANGE MARKET
1. It is a market for buying and selling of securities
2. It assists companies by helping to convert securities to cash
 3. The value s of the securities are determined by the stock exchange market
4. It serves as medium for dissemination of information to companies
5. It assists government in implementing its monetary polices
6. It gives advices to government, industrialists and other investors that deals
in securities.
WEEK 9
MONEY
DEMAND FOR MONEY
Demand for money is the total amount of money which all individual in the
economy wish to hold. In other words, the demand for money refers to the
desire to hold money. That is, keeping one’s resources in liquid form rather than
spending it. The demand for money in economics is known as Liquidity
preference.
MOTIVES OR REASONS FOR HOLDING MONEY
The three reasons for holding money according to Lord Keynes are listed below;
1. Transactionary motives
2. Precautionary motives
3. Speculative motives
TRANSACTIONARY MOTIVES
People desire to keep or hold money for day-day transaction or current
expenditures. Household needs tt hold money in order to cater family problems.
PRECAUTIONARY MOTIVES
This is when people demand for money in order to meet up with unforeseen
circumstances or unexpected expenditures which may include sickness,
unexpected visitors etc.
SPECULATIVE MOTIVES
This is the desire to hold money or cash balance in order to embark on
speculative dealings in the bond market. It is specifically a business motive and
the demand to hold money for specific purposes is elastic.
SUPPLY OF MONEY
Supply of money refers to the total amount of money available for use in the
economy at a given period of time. The supply of money involves the currency
in the form of cash circulating outside the bank as well as the bank deposits in
current accounts which can be withdrawn by the use of cheque.
FACTORS AFFECTING THE SUPPLY OF MONEY
1. Bank note: The rate of interest which the central bank charges the
commercial banks for lending money to them and discounting their bills.
2. Cash reserve: Cash reserve or cash ratio is the percentage of the deposits
commercial banks are expected to keep with them.
3. Economic situation: Central bank reduces the supply of money during
inflation in an economy and increases it during the period deflation.
4. Demand for excess reserves: when commercial banks demand for excess
reserves, the supply of money will increase.
5. Total reserve of the central bank: if the total money supplied by the
central bank is high, money supply will also be high and vice versa, the
supply of money is affected.
VALUE OF MONEY
The value of money is defined as the quantity of goods and services which a
given amount of money can buy. In order words, the value of money refers to
the purchasing power of money.
FACTORS THAT DETERMINE THE VALUE OF MONEY
1. The price level
2. The supply of money and its speed in circulation
3. Inflation and deflation
4. Volume of goods and services
MEASUREMENT OF VALUE OF MONEY
The value of money as well as the nation’s cost of living is measured by the use
of price index which is also called index of retail prices. A price index is a
weighted average of prices and is expressed as a percentage of prices existing in
a base year.
The price index number can be determined by illustrating with different
items says bournvita and sugar. The prices of the two items in 2012 were taken
as the base year and prices of 2013 as the current year.
 Price index = price in the current year divided by prices in the base year
a. Price index of bournvita
= price in the current year divided by price in the
previous year multiplied by 100
b. Price index of sugar = 2013 price divided by 2012 price multiplied by 100
Example:
Assuming that price of a packet of sugar was naira 20. 00 in 2012 but rose to
naira 30.00 in 2013.
Calculate the index number
Solution
Index number = price in 2013 divided by price in 2012 multiplied by 100%
= 30 divided by 20 multiplied by 100 over 1 = 150
Assuming the index of the base year is taken to be 100, it then means that the
index rose from 100 to 150. It equally means that the price of a packet of sugar
rose by 5% between 2012 to 2013. Thus the cost of living rose in that period.
Price index is used to compare the rise in the cost of living between any
chosen period of time.
QUANTITY THEORY OF MONEY
The quantity theory of money is defined as the relationship between the
quantity of money in circulation in an economy and the price level.
Quantity theory of money is one of the theories that try to explain what
happens when there is an imbalance between the demand for money and
supply of money.
The quantity theory of money also states that an increase in the quantity of
money in circulation would bring about services. Prof. Irving fisher modified the
quantity theory of money into what is known as velocity of circulation of
money.
Velocity of circulation of money according to prof. fisher refers to speed at
which money circulates within the economy by changing from one hand to
another. When there is an increase in the velocity of circulation of money,
prices will increase leading to a lower value of money.
 The quantity theory of money modified by fisher is expressed in what is known
as the quantity equation of exchange and is represented by the equation.
MV = PT. where
M = velocity of circulation of money
P = price level
T = quantity of goods
WEEK 10
MONEY
DEFINITION OF INFLATION
Inflation may be defined as a continuous rise in the prices of goods and services
as a result of large volume of money in circulation used in the exchange of the
available goods and services.
TYPES OF INFLATION
The four main types of inflation are listed below:
1. Demand – pull inflation
2. Cost – push inflation
3. Hyper inflation
4. Persistent or creeping inflation
DEMAND – PULL – INFLATION
This inflation occurs when consumers have high purchasing power leading to
increase in aggregate demand without a corresponding increase in supply.
COST – PUSH INFLATION
This inflation occurs when increases in cost of production are passed on to the
consumers in the form of high prices of goods and services.
HYPER INFLATION
Hyper – inflation also known as galloping or run – away inflation occurs when a
persistent inflation become uncontrollable and the value of money keeps
declining rapidly, prices of goods and services rise at a fast rate leading to
money loosing its value or its ability to buy goods war, budget deficits e t c are
the major causes of hyper - inflation.
 PERSISTENT OR CREEPING INFLATION
This is also known as chronic inflation occurs where there is a slow but steady
rise in the volume of purchasing power and fall in the supply of goods and
services. When inflation involves a slow but steady rise in the general prices of
goods and services, it is known as creeping inflation.
CAUSES OF INFLATION
1. Increase in demand
2. Low production
3. War
4. Increase in salary and wage
5. High cost of production
6. Budget deficit
7. Increase in population
8. Excessive bank lending
9. Level of importation
10. Hoarding
11. Inadequate storage facilities
12. Industrial strike
13. Money laundering
EFFECTS OF INFLATION
Inflation has both positive and negative effects in an economy.
THE POSITIVE EFFECTS OF INFLATION
1. Reduction in burden of debt. Debtors gain during inflation because there is
too much money in circulation.
2. Producers are selling their goods at higher prices during inflation; this will
lead to higher profits.
3. Government is able to realize high yield from tax during inflation.
4. Higher prices of goods and services encourages produces to embark on
large seal production resulting in greater output.
THE NEGATIVE EFFECTS OF INFLATION
1. It discourages savings
2. It increases interest rate
3. It redistributes income haphazardly
4. Creditor lose during inflation
 5. Money loses its value
6. Inflation brings about a fall in the standard of living
7. Inflation discourages investment
8. Inflation causes balance of payment problems
9. Higher prices during inflation discourages exportation of goods
CONTROL OF INFLATION
inflation can be curbed through the following ways:
1. Use of contractionary monetary measures
2. Use of fiscal measures
3. Effective price control system
4. Reduction in government expenditure or surplus budget
5. Industrialization
6. Checking the activities of hoarders
7. Increase production
8. Granting of subsidy to enterprises
9. Removal of bottleneck in distribution system
10. Discouragement of importation
11. Use of income policies such as wage freeze and delay in promotions
TERMINOLOGIES ASSOCIATED WITH INFLATION
1. Inflationary gap: This is an economic situation in which the total demand
exceeds the total supply of goods and services.
2. Inflationary spiral: This is caused by an interaction of income factors
especially wages and prices.
3. Disinflation: This refers to a set measures by which the inflationary
pressure in an economy is removed so as to maintain the value of money.
4. Reflation: This refers to an economic state of affairs in which prices,
employment, output e.t.c are picking up again as a result conscious
government policy to that effect.
5. Stagflation: This refers to high rate on inflation which exist at the same
time as industrial production is slowing down.
6. Slumpflation: This refers to an economic condition in which much reduced
economic activity co – exist with inflation.
INFLATION IN NIGERIA
Inflation has been a major problem facing Nigeria right from the period of civil
war (1966 – 1970). Before this period, the Nigeria economy was in steady
growth till the time of first military intervention in 1966 when there was a
deliberately policy of fiscal and monetary discipline. There was a balanced
budget and there was no inflation.
Due to increase in government expenditure, budget deficit became
acceptable to the government and inflation started to set in. By 1973, inflation
had risen to about 6%. In that same year, the naira was devalued and the prices
of imported commodities increased. In 1974, inflation rose to about 13% before
Udorji salary award only to leap to 34% in 1975 mainly as a result of the award.
It went down gradually until it hit 10% in 1980. It went crazy and leapt to about
22% the following year and came down again to 7% in 1982. This trend was
reversed in 1983 when it shot up to 24% and hit its all time high of 39% in 1984.
The inflation any trend persisted from 1985 and reached its excruciating level
when the structural adjustment programme (S A P) was introduced which gave
birth to second tier foreign exchange market (S F E M) on September 29, 1986,
since the introduction of of S F E M, the value of naira has been reduced to next
to nothing and this exacerbated inflation in Nigeria to unimaginable level.
GRAPHICAL REPRESENTATION OF INFLATION IN NIGERIA FROM 1973 – 1985
WAS DRAWN IN THE CLASS.
WEEK 11
DEFLATION
Deflation maybe defined as a continuous fall in the price level of goods and
services in a country as a result of decrease in the volume of money in
circulation used in the exchange of large available goods and services. Deflation
is the opposite of inflation.
CAUSES OF DEFLATION
1. Reduction in government expenditure or surplus budget
2. Increase in production
3. Compulsory bank saving
4. Excessive price control
5. Increase in taxation
6. Under – population
EFFECTS OF DEFLATION
1. Fall in prices of goods and services
2. Reduction in profit
3. It discourages savings
4. It causes unemployment
5. Increase in investment
6. Money lenders gain
7. It encourages export
8. It discourages imports
9. Improvement in the balance of payment
10. Fixed income earners will gain
11. Money gain more value
12. It encourages hardwork
CONTROL OF DEFLATION
1. Deficit budget
2. Increase in wages
3. Reduction in income tax
4. Reduction in bank rate
5. The use of open market operation (O. M. O)