Attaining a sustainable level of economic growth which would further translate into economic development is the major aim of policy makers in various countries as it impacts positively on the citizenry and drives the economy even further to a better level of equilibrium than that which it currently finds itself in. Various studies have looked at the impact of macroeconomic determinants used in this study either individually or as a collection and the effect which such have on economic growth. This study therefore empirically examined the macroeconomic determinants of economic growth in Nigeria obtaining data for a thirty five year period between 1981 and 2015 for the various variables of interest used in the study which include Gross Domestic Product (GDP), Inflation rate, Interest rate, Exchange rate and Unemployment rate.

The results of the study was analyzed using various tests such as the descriptive statistics, stationarity tests using the Augmented Dickey Fuller test and Phillip Perron tests, the Bound cointegration test for establishing the long run relationship of the variables as well as the Pairwise granger causality test to establish the level of causality among the variables of interest Also, the Autoregressive Distributed Lag (ARDL) model was used in analyzing the regression results while stability and diagnostic tests using were carried out to establish the appropriateness of the ARDL model for the study. Also, heteroskedasticity and autocorrelation tests were carried out to ensure the absence of serial correlation among the variables used in the study.

The result findings revealed that inflation contributes positively to economic growth; interest rate and unemployment have a negative impact on economic growth while exchange rate only contributes positively to economic growth in the short run with a negative effect experienced in the long run. As for past GDP, the result shows that it contributes positively to current GDP.


The study concludes that past income as influenced by the macroeconomic variables contribute significantly to the current level of income in the Nigerian economy.

The study thus recommends among others that inflation targeting which would commensurate the level of economic growth should be pursued by policy makers. Also recommended was policies which would discourage the inflow of excessive foreign capital which makes exportables expensive and worsens the import dependency of the country. In addition, social policies that would encourage transfer of resources to the rural and poor areas were recommended.

Keywords:     Macroeconomic determinants, Economic Growth (GDP), Inflation rate, Exchange



Word Count: 385




Content                                                                                                                                Page

Title page                                                                                                                                i

Certification                                                                                                                            ii

Dedication                                                                                               iii


Abstract                                                                                                                                   v

Table of Contents                                                                                    vi

List of Tables                                                                                                                          x

List of Figures                                                                                                                         xi



1.1             Background to the Study                                                                                           1

1.2 Statement of the Problem                                                                                           3

1.3 Objective of the Study                                                                                               5

1.4 Research Question                                                                                                      6

1.5 Hypotheses                                                                                                                 6

1.6 Justification for the Study                                                                                          6

1.7            Scope of the Study                                                                                                     7

1.8            Significance of the Study                                                                                           7

1.9            Operationalization of Variables                                                                                  8

1.10          Operational Definition of Terms                                                                                 8



2.1 Conceptual Review                                                                                                     10

2.1.1 Concept of Gross Domestic Product (GDP)                                                                       10

2.1.2 Concept of Inflation                                                                                                            11

2.1.3 Concept of Exchange Rate                                                                                      12

2.1.4 Concept of Interest Rate                                                                                                     13

2.1.5 Concept of Unemployment                                                                                     14

2.1.6    Overview of Macroeconomic Indicators and Economic Growth                                     14

Content                                                                                                                                      Page

2.1.7 Conceptual Design                                                                                                   16

2.2 Theoretical Review                                                                                                     17

2.2.1 Theories of Economic Growth                                                                                             17 Classical Growth Theory                                                                                                  17 Growth Theory                                                                                          17 Augmented Solow Growth Theory                                                                                  18 Endogenous Growth Theory                                                                                            18

2.2.2 Theories of Inflation                                                                                                            19 Monetary Theory of Inflation                                                                                           19 Structural Inflation Theory                                                                                               19 Rational Expectation Revolution                                                                                      19   Phillips Curve                                                                                                                  20

2.2.3 Theories of Unemployment                                                                                     21 Keynesian Theory of Unemployment                                                                           21 Marxian Theory of Unemployment                                                                                  22 New Keynesian Theory                                                                                                    22 Okun’s Law                                                                                                                      23

2.2.4 Theories of Interest Rate                                                                                                     24 Loanable Funds Theory                                                                                                    24 Keynesian Theory                                                                                                 24

2.2.5 Theories of Exchange Rate                                                                                      25 Purchasing Power Parity (PPP)                                                                                         25 Keynesian Absorption Approach                                                                          25

2.2.6 Theoretical Linkage of the Theories to the Study                                                   26

2.2.7   Theoretical Framework                                                                                                      30 Augmented Solow Growth Model                                                                                   30 Endogenous Growth Model                                                                                             30

2.3 Empirical Evidence                                                                                                     32

2.3.1 Developed Countries                                                                                                           32

2.3.2 Developing and Emerging Economies                                                                                 35

Content                                                                                                                                  Page

2.3.3 Empirical Evidence In Nigeria                                                                                             41

2.3.4 Gaps in Literature                                                                                                    44



3.0 Introduction                                                                                                                      46

3.1 Research Design                                                                                                               46

3.2 Population                                                                                                                         46

3.3 Sources of Data                                                                                                                46

3.4 Justification of the Variables                                                                                            47

3.5 Model Specification                                                                                                          49

3.6 Method of Data Analysis                                                                                                 50

3.6.1 Pre Estimation Tests                                                                                                      50 Normality Test and Descriptive statistics                                                                   50 Stationarity Tests (ADF and PP)                                                                                51 Cointegration Test                                                                                                      51 Lag Length Determination                                                                                         52 Autoregressive Distributed Lag Model                                                                      52 Causality Test                                                                                                             52

3.6.2    Post Estimation Tests                                                                                                  52 Autocorrelation Test                                                                                                   52 Heteroskedasticity Test                                                                                              53 Multicollinearity Test                                                                                                  53

3.7       Apriori Expectation                                                                                                    53

3.8Ethical Consideration                                                                                                        53




4.0 Introduction                                                                                                                      54

4.1 Preliminary Analysis                                                                                                         54

4.1.1 Trend Analysis                                                                                                               54

Content                                                                                                                                   Page

4.1.2 Descriptive Statistics                                                                                                     56

4.2 Result of Empirical Analysis                                                                                            57

4.2.1 Stationarity Tests (ADF and PP)                                                                                   57

4.2.2 Test for Cointegration                                                                                                    60

4.2.3 Autoregressive Distributed Lag (ARDL) Model                                                          61

4.2.4 Granger Causality Test                                                                                                  62

4.3 Post Estimation Tests                                                                                                        64

4.3.1 Stability and Diagnostic Tests                                                                                       64

4.3.2 Autocorrelation and Heteroskedasticity Test                                                                65

4.4 Discussion and Interpretation of Results                                                                          66

4.4.1 In comparison with a Priori Expectations                                                                      66 Summary of Findings                                                                                                 67

4.4.2 Descriptive Findings                                                                                                      67

4.4.3 Empirical Findings                                                                                                         67

4.4.4    Theoretical Findings                                                                                                   68




5.1 Summary                                                                                                                           73

5.2 Conclusion                                                                                                                        75

5.3 Recommendations                                                                                                            75

5.4 Contribution to Knowledge                                                                                              76

5.5 Suggestion for Further Research                                                                                      77

REFERENCES                                                                                                                    78

APPENDIX                                                                                                                           88





Table                                                                                                                                     Page

4.1 Descriptive statistics                                                                                                         56

4.2 Tests for stationarity                                                                                                         57

4.3 Test for cointegration                                                                                                        60

4.4 ARDL Model                                                                                                                   61

4.51 Causality table between GDP and Interest rate                                                             62

4.52 Causality table between GDP and Inflation rate                                                                        62

4.53 Causality table between GDP and Exchange rate                                                          63

4.54 Causality table between GDP and Unemployment rate                                                 63

4.61 Breusch-Godfrey Serial Correlation Test                                                                       66

4.62 Heteroskedasticity Test: Breusch-Pagan-Godfrey Test                                                  66














Figure                                                                                                                                      Page

4.1 Trend Analysis of Data                                                                                                     54

4.2 Detrending Impact of Macroeconomic Variables                                                             59

4.2 Stability & Diagonistic test using Schwarz Criterion                                                       64



















1.1             Background to the Study    

                  The relationship between economic growth and macroeconomic determinants has long been a popular issue of debate in the literature of economic development (Nihat, Ali & Emrah, 2013). The importance of economic growth in Africa cannot be underestimated with most countries experiencing low growth rates. Discussions have been made on the area of economic growth among policy makers and the focus has been on developing countries and Nigeria has not been exempted from such discussions. The debate on the key drivers of economic growth has been ongoing and it is still far from over. Godwin (2007) defines economic growth as an increase in real gross domestic product (RGDP). Research on economic growth had been undertaken in both theoretical and applied work. The main aim of macroeconomic policy is to have stable prices (low inflation), low levels of debt (whether foreign or domestic), free market economy, low levels of unemployment, having an economy based on a four sector model and based on an open economy (Mbulawa, 2015). There is therefore a need to evaluate those macroeconomic determinants of economic growth of a country with Nigeria being the country of focus in this study.

The GDP is one of the measures of national income and output for a given country’s economy at a given period of time. The definition of GDP is based on the total market value of all final goods and services produced within the country in a given period of time (normally one year). The evaluation process also involves the sum of value added at every stage of production (the intermediate stages) of all final commodities (goods and services) produced within a country in a given period of time monetarily (Kira, 2013). Gross Domestic Product represents the economic health of a country. GDP consists of consumer spending, investment expenditure, government spending and net exports; hence it portrays an all-inclusive picture of an economy (Nihat et al, 2013). It provides an insight to investors as it highlights the trend of the economy by comparing GDP levels as an index. GDP is not only used as an indicator for most governments and economic decision-makers for planning and policy formulation; but also it helps the investors to manage  their portfolios by providing them with guidance about the state of the economy (Nihat et al, 2013).

A widely accepted view in macroeconomics is that low inflation is a necessary condition for fostering economic growth. Although the debate about the precise relationship between inflation and growth remains open, the question of the existence and nature of the link between inflation and economic growth has been the subject of considerable interest and debate (Munir & Mansur, 2009). Inflation is a rise in the prices of goods and services without a corresponding increase in the value of such goods and services. Inflation remains a pervasive and persistent world problem because no economy in the world has been spared by its phenomenon. It is for this reason that making the maintenance of price stability has been a fundamental objective of macroeconomic policy. The emphasis here is that achieving the goal of price stability helps in the promotion of sustainable growth and development as well as strengthening the purchasing power of the domestic currency (Umaru & Zubairu, 2012; Ojonye, 2015). Consequently, the need to understand the relationship between inflation and economic growth of the Nigerian economy has become imperative and understanding the dynamics of inflation has become central to the achievement of price stability.

Interest rates are crucial elements in the transmission of monetary policy actions to economic activities. The interest rate policy in Nigeria for example has changed within the time frame of regulated and deregulated regimes. However, the impacts of this variable on the economic growth of Nigeria have remained controversial (Acha & Acha, 2011). The Nigerian economy has at different times witnessed enormous interest rate swings in different sectors of the economy since the 1970s and mid 1980s under the regulated regime.  The preferential interest rates were based on the premise that the market, if freely applied would exclude some priority sectors (Anyiyang, 2012). Prominent among the preferred sectors were the agricultural, manufacturing and solid mineral sectors which were accorded priority and deposit money banks were directed to charge preferential interest rates on all loans to encourage the upsurge of small-scale industrialization which is a catalyst for economic development (Udoka, 2000). However, rising interest rate over the last three years have started to hurt the Nigerian economy. Thus it is necessary to establish the link also between interest rate and economic growth in Nigeria.

Exchange rate management has been a topical issue among academics and policy makers for a very long time (Azeez & Kolapo, 2012). Exchange rate has been defined as the price of one currency in terms of another (Mordi, 2006). The increase or decrease of real exchange rate indicates strength and weakness of currency in relation to foreign currency and it is a standard for illustrating the competitiveness of domestic industries in the world market (Razazadehkarsalari, Haghiri & Behrooznia, 2011). In Nigeria and indeed any developing country, the price of foreign exchange plays a critical role in the ability of the economy to attain optimal levels in production activities (Rasaq, 2013). Rapid or persistent growth is likely to involve positive changes in the nature of economic activity which exchange rate fluctuation could encourage (Okorontah & Odoemena, 2016). However, negative fluctuations in the exchange rate of a country can hamper economic growth. It is therefore imperative to study the relationship between exchange rate and the economic growth in Nigeria.

It is a widely accepted view in economics that the growth rate measured by the GDP of an economy increases employment and reduces unemployment (Fuad, 2011). However, unemployment and slow growth continues to be two of the major challenges facing every country regardless of the state of their economic and social development (Madito & Khumalo, 2014). While the level of unemployment affects the rate of GDP-Growth, it also serves as an indicator of the country’s state of the economy as it indicate how well the economy utilizes its resources (Madito & Khumalo, 2014). Achieving a low level of unemployment rate is therefore one of the goals of many governments in the world which is also one of the policy goals of the Nigerian government, as it is believed that this can help attain a better level of growth in the country.

The focus of this research work therefore is to examine the extent to which macroeconomic factors affect the rate of economic growth in Nigeria. It should be noted that changes in macroeconomic conditions affect the performance of the economy as a whole and thus a nation’s financial health. It is therefore very important to ascertain the link between these macroeconomic conditions and economic growth.

1.2          Statement of the Problem

                  Over the years, the Nigerian economy has experienced stable rate of economic growth, though results recently points to a declining state in the level of economic growth experienced in the past especially in the last year under review in this study which was year 2015. Studies in the past have shown the state of the economy depends on the relationship that exists among various macroeconomic variables and how well these variables interplay to push the economy to a better level of equilibrium than that which it currently is in. According to Obrimah (2015), economic interactions have resulted in a decrease in inflation levels in Nigeria from about 18% in 2005 to about 12% in 2012, this cannot be said however for the results of 2015 which experienced an increase in consumer price index of about 9% which was a 11.92% rise from the 8.1% recorded in 2014 and the 8.5% figure for 2013 (Trading Economics, 2016)

Also, interest rate in Nigeria which has the ability to impact on the level of investment and availability of credit in the country has averaged about 10.24% from 2010 to 2015 following a record low of 6% in July 2009 where the country experienced tremendous economic growth (Trading Economics, 2016). This increase in interest rates attracted the inflow of foreign capital into the economy which has been sustained in the economy for a long period of time as investors found the increase in the rates for borrowing funds unattractive, thus leading to them seeking for funds from external sources. The sustained dependence on foreign capital over a long period of time has been associated as one of the major causes of a decline in the value of the naira and also a cause of the increased level of inflation in Nigeria, a country which largely depends on imported goods and has had its exportables being unattractive to other countries. Despite the lack of synergy among the level of inflation, the cost of borrowing funds represented by interest rate and the value of the local currency which is the naira, Nigeria’s unemployment rate stood at 9.0% in 2015 which represents a 34.44% change from the 7.8% which was recorded in 2014 (Trading Economics, 2016).

The increase in the level of unemployment has been associated to loss of jobs as various companies in different industries have been involved in massive retrenchments due to the uncertainty of the economic environment in the country. The effect of the variations in unemployment rate, interest rate, exchange rate and inflation rate has definitely had an impact on the environmental conditions of the household, firms and government. The result of the increase in the dependence on foreign capital coupled with the fact that Nigeria depends majorly on imports impacted on the ability of the household to buy goods and services as prices for commodities were high which thus reduced the purchasing power of the household. This also affected the level of savings of the domestic household, as increasing interest rates and its associated features discouraged consumption and thus impacted on the level of earnings of the firms as profit dropped which led to a mass retrenchments of workers in 2015. Bringing all the above fact together, it is obvious that the Nigerian economy has been performing without synergy between the macroeconomic objectives as well as the monetary and fiscal policy.

Efforts by the monetary authority, the Central Bank of Nigeria (CBN) to curtail inflation by increasing interest rate shrinks the ability of the financial sector to create more money through loans and which thus contributed negatively to growth. In the same vein, the increasing level of interest rate has failed to suppress the level of inflation, as the Nigerian economy is largely import dependent. Efforts by the monetary authority to improve the value of Naira through increased interest rate has failed to attract foreign investment into the Nigerian economy, with the domestic economy suffering from the scarcity of capital and consequently close down of industries which affected the employment rate within the economy negatively and which has also led to the consistent decline in the growth of the economy in 2015. Having this in mind, it can be said that the level of growth experienced by the Nigerian economy over the study period has been non-inclusive, as the ability of Nigerians to defend their standard of living through prior savings was insufficient. All these problems obviously need to be attended to as they all have their chain-reaction and contribution to the current level of income which obviously has its implication for economic growth of Nigeria.

1.3      Objective of the study                                                  

The specific objectives of the study are to:

  1. evaluate the relative importance of prior income (past GDP) on current national income (current GDP) and
  2. ascertain the relative significance of macroeconomic factors (inflation rate, interest rate, exchange rate and unemployment rate) on current national income (current GDP).



1.4       Research Questions

            The research questions which the study seeks to address are:

  1. Does prior income have a greater impact on current income (current GDP)?
  2. Do the macroeconomic factors (inflation rate, interest rate, exchange rate and unemployment rate) have a greater impact on current income (current GDP)?

1.5       Hypotheses

            In the course of the research work, the hypotheses were tested at 0.05 and 0.10 level of significance

H01: Prior income (past GDP) does not have a significant impact on current income (current         GDP).

H02: The macroeconomic factors (inflation rate, interest rate, exchange rate and unemployment rate) do not have a significant impact on current income (current GDP).

1.6       Justification for the Study

The macroeconomic environment of the Nigerian economy has experienced different mix of policies, from the colonial era to independence, the adoption of SAP and the emergence of the democratic government. The adoption of SAP led to significant shift in policy orientation, as the economy was exposed to varying exchange rate and deregulation of sectors of the Nigerian economy which subsequently paved the way for the democratic government. The high level of growth attained which are largely through crude oil exportation have not been fully utilised to develop the economy and thus reliance falls on the macroeconomic determinants of growth to bail out the economy. The efficiency of the macroeconomic determinants has shown varying trends over the study period. The most revealing of all is the level of non-inclusiveness of growth experienced by the Nigerian economy which is largely due to the monotonic nature of the economy by over dependence on crude oil and the abandonment of the agricultural sector. The level of income available to Nigerians has been eroded with rising inflation and over-dependence on imported consumables which further degraded the level of income generation of Nigeria, as jobs are being transferred from the importing countries (Nigeria) to exporting countries.      Putting all these into perspective, there is the need to properly analyse the role of the macroeconomic determinants in growing past and current income, and specifically how their effect on past income robs-off on current income. This thus forms the rationale for this research work.

1.7       Scope of the Study

            The study focuses on the effect of macroeconomic determinants on economic growth in Nigeria. For the purpose of this study, the years considered span a period of thirty-five years from 1981 to 2015. Data was sourced from CBN statistical bulletin and the World Bank data.  Lack of sufficient published materials such as books and journals in the library relevant to the research topic. This forced the researcher to rely on e-books which are time consuming in terms of ease of access. Also, time constraint might be another major limitation to the study given that the researcher is restricted to carry out the study within a short period of time.The study focuses on those macroeconomic variables such as exchange rate, interest rate, inflation rate, unemployment rate and economic growth. These variables form the area of interest of this research work although we have other macroeconomic variables that affect economic growth in Nigeria.

1.8       Significance of the Study     

                        The focus of the study is the Nigerian economy considering various macroeconomic determinants and their effect on economic growth in Nigeria. In order to achieve the macroeconomic goals of attaining rapid growth of the economy and the alleviation of poverty, unemployment and inequality, government authorities and its agencies come up with various policies aimed at ensuring a sound economic system which can translate into economic growth. This study would therefore be beneficial in providing appropriate suggestions to the government authorities as well as its agencies as to those macroeconomic variables that affect economic growth in Nigeria.

As at 2010, about 61% of Nigeria’s population of about 160 million live below poverty line of United State Dollar (US$) 1.25 a day (National Bureau of Statistics, 2013).This study aimed at studying those macroeconomic variables that would help in achieving a sustainable level of economic growth which would in turn transform the lives of a majority of the Nigerian populace and improve living conditions in the country. This research also serves as a guide to finance experts, economists and policy makers in formulating appropriate policies and providing advice that will serve the interest of the country at large. This study would also be of immense benefit to researchers who would be interested in undertaking similar researches in the area of interest in future and can therefore form a reference point for them in carrying out their inquiries as economic growth has become a very interesting issue in Nigeria currently in the face of the current economic recession the country is facing. This makes it necessary for studies relating to the area of economic growth to be carried out to get the Nigerian economy out of the current problems which it faces.

1.9       Operationalization of Variables

Yit = 0 + 1X1it + 2X2it + 3X3it + 4X4it + 5 X5it + it                                           1.1

Economic growth (RGDP) = f(macroeconomic variables)

Y = Economic Growth (RGDP) (Dependent Variable)

X = Macroeconomic determinants (Independent Variables)


X1 = Past RGDP

X2 = Inflation (Consumer price index)

X3 = Interest rate

X4 = Exchange rate

X5 = Unemployment rate

0= Intercept, 1-5= Coefficient of the independent variables

1.10     Operational Definition of Terms

Exchange rate: This is the rate at which a unit of currency is exchanged for other currencies. It is the price of one country’s currency in terms of another. It is also regarded as the value of one country’s currency in relation to another currency.

Inflation: This is the continued increase in the general price level of goods and services without a corresponding increase in the value of such goods and services. It is the rate at which the general level of prices for goods and services is rising and consequently, the purchasing power of naira is falling.

            Interest rate: This is the amount charged, expressed as a percentage of the principal by a lender to a borrower for the use of assets. It is the amount of interest due per period as a proportion of the amount lent, deposited or borrowed (called the principal sum).

            Gross Domestic Product: This is the monetary measure of the market value of all final goods and services produced in a country in a given period usually a year. It is the aggregate measure of production equal to the sum of the gross value added of all residents and institutional units engaged in production (plus any taxes and minus any subsidies on products not included in the value of their outputs).

            Unemployment: This is the phenomenon that occurs when a person who is actively searching for work is unable to find work. It occurs when people who are without work are actively seeking paid work.

            Economic growth: This is an increase in the output that an economy produces over a period of time. It is the increase in the inflation adjusted market value of the goods and services produced by an economy over time