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THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN FROM 1980 TO 2008

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CHAPTER ONE

1.1 INTRODUCTION

The process of globalization which is in vague is the rapid integration of trade relation productive and investment decisions across the globe by economic agents who employ and move investment capital and technology around to take advantage of environments where their competitive edge can manifest in high returns.

This process which came about with Marshall plan for Europe after the second world war has greatly expanded trade and economic contact between nations. The mass movement of commodities often over great distance have raised the standard of living world wide. International trade has made available a greater amount and a greater variety of goods for consumption. International trade has gone hand with technological improvements in production and with development of transportation, obviously this advanced in volume and variety of goods produced and traded. Factories turn out quantities of commodities large and small, which are not consumed locally but are promptly distributed to different parts of the word.

Virtually improvements in transportation and the expansion of world markets have made possible this large scale of economic production.  The world is now a ‘global village ‘ because of the continuous flaw of goods in and out of nations and the dependence by every nations upon foreign sources for variety of goods, which are of special importance. These nation economics, financial and cultural activities have boundries. Trade between nations was formerly carried out by private individuals, however in recent times government has increasingly engaged in international trade transactions directly with each other on the basis of governmental decisions.

 

  • STATEMENT OF PROBLEM

International trade involves the movement of goods and services between two countries. Payment for such goods and services are however made in an agreed currency between the exporter and the importer. And because exchange rate are variant the before the researcher is therefore to determines who bears the burden of the incidence of the exchange rate fluctuation.  More so, since the exporter /importer cannot source the foreign exchange if not through the financial institutions. The researcher therefore finds it imperative to investigate the rote played by the institutions in the exchange rate fluctuation vis-à-vis the newly introduced Dutch auction by the central bank of Nigeria.  Furthermore, the world community is a global village linked together by communications. The various exchange rate in the international markers are usually influence by the economically viable and strong economies of the world. The inter play of the economic powers of the varying strong economic attracted the curiosity of the researcher to investigate the impact of the world economic powers on the international trade vis-à-vis balances of payment and of trade. As we go about our daily lives, it is easy to over look the importance trade. American ships enormous volumes of food, air planes computer, and machinery to other countries; and in return we get vast quantities of oil foot wear, car, coffee, and other goods and services. While American pride themselves on their ingenuity it is sobering to reflect how many of our products-including gunpowder, classical music, clocks, railroads, penicillin and radar, arose from the ingenuity of long-forgotten people in faraway places.

What are the economic forces that lie behind international trade? Simply put, trade promotes specialization, and specialization increases productivity. Over the long run, increased trade and higher productivity raise living standards for all nations gradually counties have realized that opening up their economies to the global trading system is the most secure road to prosperity.

International Vs Domestic Trade

          At the deepest level, trade is trade, whether it involves people within the same nation or people in different countries. There are, however, the three important differences between domestic and international trade, and these have important practical and economic consequences.

  1. Expanded Trading Opportunities

The major advantages of international trade are that it expands trading horizons. If people were forced to consume only what they produced at home, they would be poorer on both material and the spiritual planes.

  1. Sovereign Nations:

Trading across frontiers involves people and firms living in different nations. Each nation is a sovereign entity which regulates the flow of people, goods and finance cross its borders. These contrast with domestic trade, where there is a single currency, where trade and money flow freely with the borders and where people can migrate easily to seek new opportunities. In international trade, political barriers to trade are sometimes erected when affected groups object to foreign trade and nations impose tariffs or quotas, this practice is called protectionalism.

  1. Exchange Rates:

Most nations have their own currencies. One may want to pay for Japanese car in Naira while Toyota wants to be paid in Japanese Yen according to the exchange rate, which is the relative price of different currencies (such as the price of Japanese Yen in terms of Nigerian Naira). The international financial system must ensure a smooth flow and exchange of Naira, Yen, and other currencies-or else risk a breakdown in trade. The financial aspects of international trade are analyzed in the chapters on macroeconomics.

  1. Trends in Foreign Trade:

What are the major components of international trade for Nigeria? The major components of international trade in Nigeria are crude oil, cotton, cassava, maize, wheat, etc. Within a particular industry, Nigeria exports and imports at the same time because a high degree of product differentiation means that different counties tend to have niches in different parts of a market.

SOURCES OF INTERNATIONAL TRADE

Trade in Goods and Services

Nations find it beneficial to participate in international trade for several reasons: diversity in the conditions of production, differences in tastes among nations and decreasing costs of large-scale production.

Diversity in Natural Resources

Trade may take place because of the diversity in productive possibilities among counties. In fact, there are differences that reflect the endowments of natural resources. One country may be blessed with a supply of petroleum, while another may have a large amount of fertile land. Or a mountainous country may generate large amounts of hydroelectric power, which it sells to its neighbours, while a country with deepwater habours may become a shipping centre.

Differences in Trade

A second reason for trade lies in preference. Even if the conditions of production were identical in all regions, countries might engage in trade if their tastes for goods were different.

Differences in Costs

Perhaps the most important reason for trade is differences among countries in production costs. For example, manufactory processes enjoys economies of scale, that is, they tend to have lower average costs of production as the volume of output expands. So when a particular country gets a head start in producing a particular product, it can become the high-volume, low-cost producer. The economic of scale gives it a significant cost and technological advantage over other countries, which find it cheaper to buy from the leading producer than to make the product themselves.

 

  • OBJECTIVES OF THE STUDY

The objectives of this research work are as follows:

  1. To seek and determine as far as possible methods by which the risk associated with exchange rate fluctuations can be minimized.
  2. To determine who should bear the burden of the delayed interest – the commercial banks, the central bank or the importer?
  3. To ascertain whether the abolition of the compulsory advance deposit requirement is being complied with and also determine the implications of the advance full payment of import duty with regards to importers.
  4. To discover if the introduction of counter trade by the government is alleviating the problems created by the delay of international trade and to make appropriate recommendations.
  • HYPOTHESIS

The hypotheses for this research work are formulated after thorough in-depth analysis of secondary data collected and the assessment of the result of the pilot survey conducted.

The hypotheses are tentative statements that are yet to be proved; the hypothesis for the research takes its bearing from the statement of problem and it is as follows:

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