The study empirically examined the impact of terms of trade on the growth of Nigeria economy (1980-2016). The specific objectives include are; to ascertain the impact of terms of trade on economic growth of Nigeria and to determine the relationship between terms of trade and economic growth of Nigeria. Secondary data used for the study were source from Central bank of Nigeria statistical bulletin and Nigeria bureau of statistics bulletin and were analyzed with trend analysis, simple regression model and correlation coefficient using the Ordinary Least Squares (OLS) method. The result reveals that terms of trade has positive and significant impact on gross domestic product of Nigeria. The correlation result shows that there is positive relationship between terms of trade and gross domestic product of Nigeria.. It is recommended both federal and state government should put in place policies that promote industrialization and enhance domestic production. This may be done by formulating and implementing dynamic terms of trade and keeping trade openness rate below or at ceiling level in order to ensure economic growth, since terms of trade has positive and significant impact on economic growth of the country…
1.1 Background of the Study
Right from the time of the classical economists, the theory of trade had been considered as vital in the explanation of the economic growth process of any country.
This was hinged on the observed long historical interdependence among the various economies of the world. In essence, no country is a complete island to itself. It is for this reason that international trade theorists have always tried to explain observed patterns in national development standards in terms of their differential nature endowment and production efficiency (United Nation, World Economic and Social Survey, 2013).
The interaction among production, distribution and exchange across national frontiers, and their implications for economic growth from the central core of trade theory. It can be said that the positive effects of trade on economic growth were first pointed out by Adam Smith (1776). This was the prevailing economic idea, with an exception of the relative hibernation during the marginalist revolution until World War II (Alfonso, 2011).
After World War II, the dominating idea of free trade was truncated by the introverted and protectionist economic growth experiments especially in Latin America (Alfonso, 2011).
Owing to the failure of the protectionist experiments and the observed association of quick economic growth with the opening of international trade and consequent specialization in several countries, as well as the results of many studies based on the neoclassical theories, a new decisive role was given to international trade as the driving force of economic growth (World Trade Organization, 2013). However it is pertinent to note at this point that although the dominant theoretical postulations (beginning with the classical) indicate a positive trade-economic growth nexus, most studies concentrated only on the static effects of trade. But after a survey of the extant empirical literature, Baldwin (2014) posited that the static gains of trade were of little significance. This led to a series of debates in the last decades on the precise direction of trade and stressing its dynamic effects on economic growth. The theoretical isolation/separation of these two effects (static and dynamic) was facilitated by the models of endogenous economic growth (especially after the works of Romer (2014) and Lucas (1988). The endogenous growth models stimulated the undertaking of empirical studies which moved towards an integrated and more robust analysis of the relations between trade economic growths. It is therefore clear that the transmission channels through which trade stimulate economic growth are derived from both the dynamic and dynamic gains from trade.
In view of the foregoing analysis, trade is widely accepted as a major engine of economic growth. Thus, international trade has been an area of interest to decision makers, policy makers as well as economists. It enables nations to sell their locally produced goods to other countries of the world, and provides a platform for a country to expand her markets for both goods and services, that otherwise may not have been available to her citizens (Adewusi, 2010). In a concise form, foreign trade means per capita income of a country is based on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services (Omoju and Adesanya, 2012).
It has been established in the literature that exports trade is an engine of growth. According to Omoju and Adesanya (2012), export increases foreign exchange earnings, improves balance of payments position, creates employment and development of export oriented industries, and improves government revenue through tax revenue, levies and traffic. These benefits will eventually transform into better living conditions for the citizens of the exporting economy since foreign exchange derived from trade could contribute to meeting their importation of some essential goods and services for which they do not have comparative advantage (Omoju and Adesanya, 2012). International trade is also important for growth because it generates channels for technological diffusions, since it enables less developed countries to import intermediate inputs and equipment to support their domestic production process. Thus, the literature has provided a basis for linking trade and growth at the level of individual firms and sectors (Stone and Shepherd, 2011).
The Nigerian economy has been dominated by both production and consumption of local goods and services as well as foreign transactions in goods and services. Before her political independence in 1960, Nigeria had been an active player in the field of foreign trade. Thus, the Nigerian economy has had her fair share of international trade since the 1960s even though the composition of trade has evolved over the years. However, despite her involvement in international trade the Nigerian economy, until recent years, had recorded dismal growth rates. In view of this, this project is going to take a position whether Nigeria’s economic stagnation for many years can be attributed to international trade or whether her relative economic growth can be attributed to her taking part in the field of international trade. Put in other words, how significantly has international trade contributed to Nigeria’s growth? This project will attempt to answer this important question.
1.2 Statement of the Problem
Economic history shows that trade is an important engine of economic growth for countries at different stages of development. However, the share of a country in world trade depends on the properties of the goods the country produces, the articulation and pursuit of domestic economic policies, and trading approaches adopted. That is why Thirwall (2010) asserts that the volume of exports of developing countries has grown shower than that for developed countries because developing country still largely produce and export primary commodities and low-value added manufactures with a relatively low income elasticity of demand.
In addition, the discrepancies in the rates of growth of exports have been wider in value terms because the terms of trade of developing countries such as Nigeria has deteriorated vis-à-vis those of developedcountries. This resulted in a fall of developing countries share of the total value of world trade from 30 percent in 1960 to 20 percent today (Thriwall, 2010). Thus, despite the predictions of trade theory, the issue for developing countries in general, and Nigeria in particular is not so much as whether to trade, but in what to trade, and the terms on which to trade.
Following the adoption of the Structural Adjustment Programme [SAP] in 1986, Nigeria experienced a structural shift in its economic structure and trade policies. The import-substitution industrialization strategy of the 1970s was replaced by export oriented industrialization strategy. In order to liberalize foreign trade, the Nigerian government abolished the field exchange rate regime, abolished the import license requirement for producing foreign exchange and deregulated the exchange rate of the naira to all its value to align with the dictates of market forces (Ochei, Tochukwu and Areghan, 2016).
In effect, the Nigerian economy is now more and more integrated into the global economy, and foreign trade become one of the essential foreign trade has become one of the essential elements of economic growth in the country especially during the last three decades. Thus, the issue of trade and its impact on the Nigerian economy has gained prominence since the country opened up its economy to the world through the implementation of liberal economic policies provide credit and risk bearing facilities to banks, so as to encourage them to support exports (Dele, 2010)
In view of the above, the impact of international trade on the Nigerian economy is a well-researched topic in the literature. However, there are some observed shortcomings in the empirical approaches adopted most of the existing research. First, most of the empirical studies such as Bola, (2015) did not examine the determinants of Nigeria’s international trade which should naturally be the first step in explaining the transmission channels through which the gains of trade impact on economic growth. Without a clear explanation of the transmission channels, many of these studies have not been able to emphatically establish the causal relations between international trade and economic growth.
And second, the econometric models applied in studies such as Analogbe (2010) did not disaggregate Nigeria’s international trade into the four main components; oil export, non-oil export, oil-import and non-oil import. The need for disaggregation of the Nigeria economy into these four compounds is to trace with a certain degree of precision which trade variables produces. The greater growth impact on the Nigerian economy. Without doing so two problems arise.
One, the specified model may produce spurious results of doubtful policy relevance. And two the estimated results may be too general in nature as to provide a proper empirical platform for articulation and recommendation of specific policy measures.
The contribution of the work to knowledge is that the work will give fresh insights into the theoretical discussion of the nexus betweenterm of trade and economic growth at least within the context of the Nigerian economy for the specified period (1980-2016).
1.3 Objectives of the Study
The broad objective of this study is to empirically examine the impact of terms of trade on the growth of Nigeria economy(1980-2016). The specific objectives include are;
1.To ascertain the impact of terms of trade on economic growth of Nigeria.
2.To determine the relationship between terms of trade and economic growth of Nigeria.
1.4. Research Questions
- What are the impact of terms of trade on economic growth of Nigeria?
- Is there is any relationship between terms of trade and economic growth of Nigeria?
1.5 Research Hypotheses
The understated hypotheses will be subjected to empirical analysis for validation or rejection.
H01: Terms of trade has no significant impact on economic growth of Nigeria.
H02: There is no relationship between terms of trade and economic growth of Nigeria.
1.6 Significance of the Study
The finding of this study is significant for its policy relevance and academic contribution. Specially, it should be of great value to:
- The Nigerian Government: The empirical results will enable the government to know the major macroeconomic international trade variables that have the greater impact on the Nigerian economy. This knowledge will help the government in the negotiation of trade agreements and deals which should provide stronger impact on the Nigerian economy.
- Trade policymakers: The findings and recommendations of this study should provide trade policymakers with an analytical framework with which to formulate international trade policies of Nigeria. Based on the empirical results and policy implications of the study, they will be better placed to articulate trade incentives and other policy measures that will ensure a greater growth impact of term of trade on the Nigerian economy.
- Research scholars and students: The contents of this study will not only be a rich source of reference materials to research scholars and students on the growth impact of terms of trade on the Nigerian economy. It will also serve them well as an excellent contextual guide for any study in a related field.
1.7 Scope of the Study
This study is to examine the impact of terms of trade on the growth of Nigeria economy.. It will be limited to the 1980-2016 time frame.
The study will also empirically identify the macroeconomic variables that determine Nigeria’s international trade. The empirical analysis will be supported by the time series data of the relevant macroeconomic variables for the period covered by the study. In effect, the empirical analysis and other discussions will be restricted to the 1980-2016 period and the macroeconomic variables that were stated in the hypotheses.
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