Full Project – EFFECT OF INFLATION ON THE ECONOMIC DEVELOPMENT OF EDO STATE

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CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Inflation can be defined as persistent rise or increase in the general level of price. Inflation is an economic situation whereby so much money is chasing few goods. It is a problem which affects every country of the world especially developing countries like Nigeria which goes a long way to affecting the states. Inflation is the most serious problem prevailing I our economy today, which seems to be assuming an economic epidemic dimension. As everybody is struggling to survive, prices of goods and services are at a rapid alarming rate of increase. The historical perspective of inflation can be narrowed down to the 1950s and 1960s. a decade before this period was the general inflationary period in the world. It was at its peak in the 1960s when the Nigeria civil war ended as all the resources of the nation were diverted towards the production of arms and ammunitions (weapons of war). Able bodied men who would have engaged in farming were as a result of this, the agricultural sector of the economy suffered, thus the few available goods were distributed in favour of those in the upper class.

The product of this was unemployment that starved thousands of youths since industries were shut down. There was a considerable increase in government expenditure which was not equated with taxation as many of the working age were unemployed. Consequently, government had to pay a large part of the expenses by minting (creating/printing) more money and borrowing from banks. Thus the volume of money in circulation increased without no corresponding increase in goods and services. We all now feel the bite since food and non-food items have continued to increase, some consumers notable the poor feel the effect most. Most households in Edo State are made up of low income earners who have to contend with the continuing inflationary trend. Hence, there is need to study and provide a pragmatic solution from the basis of this research.

The word inflation rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects. The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years. Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy (Lipsey and Chrystal, 1995). Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation.

After an appreciable economic performance in the early 1970s, the Nigeria economy witnessed some anxious moment in the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level. The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. In this case, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximised, cost should be minimised. One of the main cost is inflation, which has turned into a canker worm eating deep into the nation’s path of economic progress. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. The economy faced renewed pressures and some uncertainty towards the end of the year as the C.B.N gradually relaxed its tight monetary policy.

Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level. This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability (Salam et al, 2006). The effects of inflation on economic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth.

STATEMENT OF PROBLEM

Inflation is undesirable. This is due to its negative and disastrous effects on our economy since both the rich and poor are suffering from it as cost of living is high. This study intends to investigate the causes and effects of inflation in Edo State. The following questions are intended to be provided with answers from this study:-

To what extent has inflation put miserly, anguish and pain in the face of the masses in Edo state?
In what way does the persistent fall in purchasing power of a unit of nation’s currency causes inflation?
Does the government contribute in any way to the inflation being experienced in Edo State?
Could scarcity of goods lead to high prices?
Could inflation be as a result of too much money in circulation i.e. increase in supply of money?

OBJECTIVE OF THE STUDY

The objectives of the study are as follows:-

To ascertain the effects of inflation on the economy of Edo State.
To determine the effects of inflation on Edo people.
To ascertain the various measures of controlling inflation.

RESEARCH QUESTIONS

For the purpose of this study, the following research questions have been designed:-

Does Inflation occur when demand is greater than the supply of goods and services?
Is the financial indiscipline of the government is directly related to the inflationary position on the economy of Edo State?
Does devaluation of the nation’s currency (naira) have a negative effect on the economy?

SIGNIFICANCE OF THE STUDY

This study is unique because it is going to be useful to both the rich and poor. The significance of this study therefore is based on its attempt to make both the general public and government see the need to contribute their own quota to the fight against inflation. When the solutions are proffered, policy makers as well as the government will know what decision to take as regarding inflationary problems. The researcher therefore hope that this research work will enlighten and open the eyes of both the citizens and government to see the areas where they have consciously or unconsciously aided inflation, thus finding solutions to inflationary problem as there is no problem without solution. The study will therefore critically x-ray the causes, effects and possible remedies to inflationary trend in Edo State.

SCOPE OF THE STUDY

The scope of this study for the purpose of this research will pose its attention on Edo State considering the causes, effects and possible solution of inflationary trend and how it affects the people of Oredo Local Government Area in Edo State. The scope of this study will focus its attention on market women, street traders, civil servants and students in Oredo Local Government Area of Edo State.

DEFINITION OF TERMS

Inflation: This can be defined as any increase in the money supply; however this can be regarded as inflation. This can also be seen as persistent in average price level of goods and services resulting in diminishing purchasing power of a governmental sum of money. Also when the volume of money in circulation is greater than the available goods and services so that there is a continuous tendency for average price level rise.

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Full Project – EFFECT OF INFLATION ON THE ECONOMIC DEVELOPMENT OF EDO STATE

Full Project – EFFECT OF INFLATION ON THE ECONOMIC DEVELOPMENT OF EDO STATE

Full Project – EFFECT OF INFLATION ON THE ECONOMIC DEVELOPMENT OF EDO STATE

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