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 Supply and Demand-Side Policies be Used to Assist Businesses?

An important concern for all economists is protecting the industries in an economy. Without adequate industries and businesses, an economy can not reach it’s full output potential, and suffers. In order to ensure that these corporations are able to survive in the economy, the government can enact a number of fiscal and monetary policies (covered in the last two posts). These include policies that are both supply-side and demand-side.

A supply-side policy is a policy aimed at regulating the aggregate supply of an economy. This can include both fiscal and monetary policies. A fiscal supply-side policy is a policy aimed at supporting industry growth and change. This includes government spending to increase private research and development in order to increase the economy’s efficiency, increasing AS. Additionally, The government can cut business taxes to allow more business spending and expansions, or even improve transit systems to reduce business costs. A  monetary supply-side policy is a policy aimed at regulating the flow of capital in the economy. By either bringing more capital into or draining money out of the economy, the government can alter the money flow and therefore regulate the AS in the economy.

A demand-side policy is a policy aimed at regulating the aggregate demand of the economy. This can include both fiscal and monetary policies, covered in previous blog posts (see below). These policies look at altering the AD of an economy in order ensure consumer security by preventing (or provoking) a recession or inflation.

In order to protect business in the economy a government can reduce production costs associated with the aggregate supply and increase aggregate demand in order to increase consumer spending. By improving the economy’s infrastructure and reducing business tax and production costs (like wages), a government can reduce the aggregate supply of the economy. Then, by increasing spending on consumer benefits, such as working incentives, the government can move the AD in order to protect the businesses in the economy.

How Can Monetary Policies Be Used to Assist the Elderly?

In an economy, economists face difficult decisions when dealing with the retired population. A retired population within an economy acts with much differently than a working population. The working population depends on income in order to build assets and be able to buy goods and services in their life. But, by the time a member of the working population chooses to retire, they depend completely on the assets they’ve built during their working lifetime in order to support their livelihood. However, one of those assets is generally a large nest egg saving deposited in a bank. That means that these investments are reliant upon the interest rates imposed by the banks to allow them to grow. By incorporating monetary policies, a government can protect these savings for the retired population in the community. A monetary policy represents a policy that adjusts the interest in the economy. By raising interest rates, the government can effectively protect the savings of the elderly by assuring their assets grow steadily on an annual basis. This works because as the interest rate increases, the saving grows by a larger percentage annually.

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.

Section 3.3 and 3.4 Formative Reflection

In studying Supply-side and Demand-side policies in lessons 3.3 and 3.4, I was able to learn a lot about the effects of government intervention through both fiscal and monetary policies in the economy. A fiscal policy is a policy enacted by the government to alter taxes, spending, and the flow of capital. By raising or lowering taxes while increasing or decreasing government spending, fiscal policies are able to regulate an economy’s demand. Additionally, by controlling the flow of capital in an economy with payouts, a government can regulate an economy’s supply as well. A monetary policy is a policy that alters the interest rates in an economy. This can increase or decrease the consumer’s disposable income, thus regulating the demand within an economy.

Neoclassical economics argues that governments should have limited or no intervention in the economy, and that any intervention only serves to worsen the state of the economy. Contrary to this, Keynesian economics argues that governments should play an active role in regulating an economy’s supply and demand. In the formative examination, I scored myself with an 8/10. I did this feeling I had a strong  understanding of the macroeconomic concepts discussed in class. I was able to identify how demand and supply adjustment were able to create inflation in an economy. In my analysis of the situation however I failed to provide real world examples to link my knowledge of the concepts to the real world. I believe that in the upcoming summative assessment I will provide examples to show how my understand is applicable to the modern world.