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THE CONTRIBUTION OF THE AGRICULTURAL SECTOR TO THE DEVELOPMENT OF NIGERIA ECONOMY 1983 – 2015

CHAPTER ONE

INTRODUCTION

  • Background of the study

One of the features that distinguish international trade from domestic trade is that each nation has its own currency and its own banking system. Prices in each country rely on the country’s currency units be it dollars, naira, pounds, euro, rupees, francs, ceddis and so on.   Exchange rate refers to the price of a domestic currency in terms of a foreign currency. Exchange rate plays a key role in international economic transactions because no nation is self sufficient due to varying factor endowment as well as comparative advantages. According to Jhingan (2009), this price is as a result of the interaction of the forces of demand and supply of foreign currencies in any particular period of time. It determines the relative price of domestic goods and services as well as the external sector participation in the international trade. Dornbusch (2004), defined exchange rate as the rate at which one currency is exchanged for the currency of another country. Whereas Mankiw (1997), defined it as the price at which exchange between two countries takes place. The exchange rate has two main components; the domestic currency and foreign currency and it can be quoted directly or indirectly. In a direct quotation, the price of a unit of a foreign currency is expressed in terms of the domestic currency; the foreign currency is the base currency while the domestic currency is the counter currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of foreign currency. In this case, the domestic currency is the base currency while the foreign currency is the counter currency. Most exchange rates use the American dollar as the base currency and other currencies as the counter currency. (1: N)  (Base: counter). In addition, there are exceptional cases such as the Euro and commonwealth currencies like British pound, Australian Dollar and New Zealand Dollar.

The exchange rate between the Nigerian naira and the American dollar is the number of naira required to purchase one dollar which is currently about N360 per dollar. The exchange rate of naira per dollar will be maintained in the world exchange market by arbitrage. Arbitrage refers to the purchase of foreign currency in a market where its price is low and to sell it in some markets where its price is high. The essence of arbitrage is to remove differences in the foreign exchange rate of currencies so that there will be a single rate in the world exchange rate market. Exchange rate has played an important role in the macroeconomic performance of a nation. Many economists argue that exchange rate stability facilitates production activities and economic growth and misalignment in real exchange rate distorts production activities and hinders export growth, generates capital flight and macroeconomic instability (MamtaChowdhury 1999).


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