Data Response – Nigeria

Question 1:  Explain using supply and demand diagrams why in the last two decades of the 20th century the long term price of commodities such as oil fell.

One explanation for the drop in oil prices in the last two decades of the 20th century is an increase in its supply, or availability. This increase in supply coincides with times of increased drilling for crude oil in the world, specifically in countries such as Saudi Arabia and the United Arab Emirates, making it a valid explanation for the drop in long term commodity prices. This increase in supply be demonstrated on a supply and demand graph, as seen in Figure A. Here the supply of oil increases from S1 to S2, causing a decrease in price. The price here drops across the two decades from USD 37 to USD 17, as shown in Figure A. A subsequent effect of the drop in oil prices is the increase in demand and therefore Real GDP, which is shown as Q1 increases to Q2 in Figure A.

 

Question 2:  Explain how falling commodity prices can impede economic development.

With an increase in global oil supply and a drop in oil prices, oil producers receive less revenue for a static quantity of oil. This means that oil producing countries, such as Nigeria, face reduced revenue as additional producers, such as UAE encroach on market shares. This means that the total GDP for the country decreases as there are less injections from oil exports into the economy. With less liquid currency moving within the Nigerian economy economic development is restricted. This is because economic development depends on the transfer of capital in the economy. As capital moves within the economy it is available for development and expansion of markets within the economy, which in turns provides consumers and producers with more availability. This is a form of economic development, as the economy expands, while it does not necessarily raise the standard of living for everyone in the economy.

 

Question 3:  Using the data above, comment on the economic development process in Nigeria over the period 1997 to 2009.

Economic development took place over the last decade in Nigeria as the price of oil rose. The result of this is an increase in the revenue for Nigeria and therefore the available capital in the economy. With capital available in the economy for spending and purchasing goods both consumers and producers are stimulated, resulting in increases in investment and overall purchases. This inflow of capital can be seen in the data as Nigeria is constantly positive in its current account balance (with the exception of 2001), which means that it is annually exporting more than it is importing, result in an increase in capital for the economy. The result, as shown by the data is an increase in the spending on healthcare in Nigeria, as infant mortality has dropped significantly from 2001 to 2009. Additionally the Nigerian economy has developed in reducing its outstanding debt from 1997 to 2009, which indicates again that the Nigerian economy is looking to secure future development.

 

Question 4:  Examine the factors that might have caused the fall in the economic potential of a country as rich as Nigeria.

Factors that could have potentially caused a drop in the economic potential for a country as rich as Nigeria include, most namely, a drop in potential revenue that fuels the country’s development. As it can be seen in the data above, the drop in oil prices resulted in a drop in revenue for the Nigerian economy, and with less liquid capital in the economy it becomes harder for consumers and producers to expand and develop. This drop of revenue, while a singular factor effecting the economy, can stem from a number of sources. Most likely given the historical context of Nigeria, an increase in supply of oil from other producers has driven down the global price of oil, reducing Nigerian revenue. A drop in the supply of Nigerian oil could be a cause of revenue loss as well, as there is less inflow to the Nigerian economy. Finally, a drop in consumer demand for Nigeria’s exports, both oil based and otherwise, could be a cause for a fall in economic potential for Nigeria. While this is unlikely given the global growing demand for oil since the 1950’s, it is a possible factor to take into consideration.

 

Question 5:  From the early 2000s the price of oil has risen again. Using appropriate diagrams, evaluate the impact of an oil price increase on the economy of Nigeria.

As the price of oil has risen the impact in Nigeria has been an increase in revenue from oil exports. This is apparent in the data given the  drop in outstanding debt (which could only come from revenue in Nigeria being used to pay back the debt), the consistent current account surplus experienced by the Nigerian economy (with the exception of 2001), and the consistent GDP growth in excess of 3% since 2000. This can be attributed to the increase in oil prices globally as the demand for oil increases. This can be represented on a supply and demand diagram, such as in Figure B. Here, demand increases from D1 to D2, which subsequently leads to a rise in price, specifically from 17 USD in 1995 to 104 USD in 2011. The result is a further increase in the Real GDP of Nigeria from Q1 to Q2.

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How Can Fiscal Policies Be Used to Protect the Working Class?

In economics, many economists worry about the protection of the working middle class. This sector of the economy is generally understood to be very sensitive to economic adjustments. Any drastic changes in the aggregate demand or aggregate supply of an economy has been shown to have the most substantial impacts on the middle class. In addition, the middle class generally makes up the majority of the economy, meaning that if it is put under economic stresses, the entire economy suffers.

For this reason economists commonly devise fiscal policies to try and protect the middle class and it’s workers. A fiscal policy is a policy aimed at controlling the AD by increasing or decreasing government spending and taxation. The government can use these policies to protect the middle class by a number of means. By granting them tax deductions, the government is able to increase the real income of the middle class workers. By increasing spending on middle class benefits such as health and safety plans aimed at protecting the unemployed, the government is also able to protect the middle class.

Increase in Demand by Trading Partners Leads to an Increase in Aggregate Demand in Singapore

According to this Topnews article, an increase in demand by Singapore’s trading partners has resulted in an in increase in Singapore’s aggregate demand. The aggregate demand of a country is the entire demand for all firms and companies in the economy.This increase in aggregate demand is due to the increase demand by Singapore’s trading partners, as Singapore is now required to export more. In order to increase exports Singapore must increase total production. On a graph this can be represented as a shift along the production axis, as shown in Figure 1. As demand for Singaporean exports by foreign trade partners increases, Singapore undergoes an increase in production. Q1 represents production prior to the increase in foreign demand. Q2 represents the final production in Singapore following the increase in foreign demand. Here we can see that there is an increase in production from Q1 to Q2 due to the increase in aggregate demand. This increase in aggregate demand, or AD is represented by the shift from AD1 to AD2 in the diagram. AD1 represents the aggregate demand in Singapore prior to the increase in foreign demand for exports. AD2 represents the final aggregate demand in Singapore following the increase in foreign demand for exports. Here we can see there is a clear shift right along the production axis, resulting in the shift from Q1 to Q2. Along the Cost axis however, price for the exports remains constant at P1.

Pricey Raw Materials Causes a Rise in Beer Production Costs

The price of beer production is set to increase as the price of raw materials for beer production increases as well. Using our understanding of Economics and Cost vs Output, we can represent this shift. In Figure 1, TVC represents the Total Variable Cost, which is graphed as price over output.. The raw materials costs for the production of beer are variable costs, as they can change based on the market. Variable costs are subjected to the three major laws of cost output: Increasing Return, Constant Return and Diminishing Return. Increasing Return states that as the initial units of variable cost (those directly proceeding the costs origin) produce a large return for a small increase in cost. In Figure 1, this is represented by the steep curve projecting from the graphs origin. Following this, Constant Return shows an equal increase in output for every unit of variable cost added. This is represented by the linear section of the graph following the area of Increasing Return. Finally, the law of Diminishing Return states that at a certain point, for every unit of variable cost added, the output is less. On Figure 1 this is represented by the rising curve toward the right of the TVC curve.

In Figure 1, the rise in the price of raw materials for beer is represented with the shift from TVC to TVC1. From this shift, we see that the initial variable cost remains at 0, as both TVC curves cut the axis’ at 0. However, due to the increase in price of raw materials, the TVC1 curve rises above the initial TVC curve representing higher prices for equal output between the two lines.