BALANCE OF PAYMENT DETERMINATION: THE MONETARY APPROACH (ECONOMICS PROJECT TOPICS AND MATERIALS)
CHAPTER ONE
1.1. HISTORICAL BACKGROUND OF THE STUDY
The monetary approach to balance of payments (MABP) has been a dominant view in the International Monetary Economics, particularly; the theory is believed to’ have a long historical background. Which can be traced back to the writings of the classical economists who conceived a system of integrated world capital market and mobility? It is linked to the origin of balance of payments theory in the work of David Hume, and more specifically, to this theory of price-specie-flow mechanism (Johnson, 1976). While criticizing the objective of mercantilism in accumulating precious metals, David Hume pointed out that the amount of money in a country would be adjusted automatically to the demand for it. In Hume’s analysis, the process in which this adjustment takes place is through surpluses and adjustment deficits in the balance of payments brought about by changes in relative national money price levels. However, while drawing heavily from Humes theory of balance of payments, and this analysis of price-specie flow mechanism, the monetary approach places emphasis’ on monetary considerations in the interpretation of external balance problems rather than on changes in relative national price levels (Dornhusch and Fischer, 1990, 764).
The balance of payments account in Nigeria since political independence has undergone periods of boom and doom at different stages. The period of boom has been short-lived and is essentially attributed to the unprecedented increase in the oil price of 1973 – 1974. Apart from this period, Nigeria has continued to experience serious problems In the balance of payments position and the problem became severe in the early 1980′ s. From an overall surplus of about N2A billion in 1980 in Nigeria’s balance of payments, the country recorded a persistent deficits of (N3 billion), (Nl.4billion) and (0.3billion) in 1981, 1982 and 1983 respectively.
The internal factors that are responsible for the adverse balance of payments position in Nigeria include among other things, excessive demand for foreign products, heavy reliance base, political instability and structural rigidities in the domestic production process. The weaknesses, in the domestic macroeconomic policies have tended to the problem. Moreover, the trade and exchange rate policies pursued during the oil boom era of 1970s and early 1980s failed to generate the required incentives for earning or saving foreign exchange. Rather, they resulted in several macroeconomic distortions and entrenched import-oriented consumption and production patterns in Nigeria which widened the trade gap.
