ABUBAKAR TAFAWA BALEWA UNIVERSITY, BAUCHI

DEPARTMENT OF ESTATE MANAGEMENT AND VALUATION

FACULTY OF ENVIRONMENTAL TECHNOLOGY

COURSE CODE: ENV 222

LAND ECONOMIC II

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 THEORY OF INCOME
INTRODUCTION
Income
The income theory of money was conceived in the 19 th century and in the first
half of the 20th century, it formed the backbone of all the main monetary
approaches of the time. Yet, since it did so, mostly implicitly rather that
explicitly and since the later developments move economic theory in a different
direction, the income theory of money is hardly remembered at present. While
mainly accounting for the origin of the approach, I am also offering a brief
comparison with the present mainstream economics and I shortly address the
question of the possible future of the theory too. The income theory of money
explains how nominal prices are formed by the interaction of nominal
expenditures streams with real streams of goods sold. While various ideas
leading to this theory were express already by John Law and Richard Cartillon.

DEFINITION OF INCOME
Before the definition of income, it is imperative to understand the term theory.
Theory is a statement of assumptions which explains why something happened
and predicts to be true (ESV. Habu Babayo).
Income is a reward paid to any factor of production i.e. labour entrepreneur,
land and capital in the form of wages, profit, rent and interest respectively. It is
a form of reward received after a specific time frame. If a person doesn’t work
as a labourer or entrepreneur, he must have some property which always exists
in the form of land and capital. When land or capital gives to an entrepreneur for
the productive use, the reward paid to the owner will be either rent or called
interest. (Johnson Ugoji Anyaele).
In other words, Income surfaces or is said to be accrued when the four factors of
production are expressed or exercised.
Below are the four factors of production which leads to income determination.
1. Land
2. Labour
3. Capital
4. Entrepreneur

 Land as a factor of production is a free gift of nature like water, forest,

mineral resources. The supply of land is limited and the reward for land is
rent.

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 Labour: This is both physical and mental efforts of man directed to
production. It is one of the variable factor of production. This involves
human beings who work with other factor of production like land and capital
in order to produce goods; the reward for labour as a factor of production is
wages and salaries.
Types of Labour
i. Unskilled labour: This involves little or no education, and require the
use of physical energy in production or the physical effort of man
direct to production.
ii. Semi-skilled Labour: This involves the combination of both physical and
mental efforts in carrying out productive activities. It includes worker with
little education and training.
iii. Skilled Labour: This involves the use of mental efforts in carrying out
productive activities. That is, it involves the workers who make use of their
mental efforts in carrying out production processes. These are professionals e.g.
Economist, estate surveyor and valuer, lawyer etc.

 Capital is a wealth or money reserved or set aside for the production of

further wealth. It means different things to different people. For a trader,
money and his wares, may mean capital to him while to a farmer his seeds,
hoe and machetes; capital plays a crucial role in the production process. The
reward is interest.

 Entrepreneur: An Entrepreneur is defined as the factor of production that

coordinates and organizes other factors of production for a more productive
purpose. For production to take place, administration or organization is
considered a sine qua non. This is why the entrepreneur as a factor of
production is also known as enterprise or organization. The entrepreneur is
normally the person who risk their capital in establishing a business, whose
profitability cannot be determined at that time. The reward for entrepreneur
is profit or loss.

TYPES OF INCOME
There are bunch of different ways you can get money. Some you have to work
for, others your money does the work for you. Let’s take a look at a couple here.
 Wages: This is income you earn from a job where you are paid on hourly
rate to complete set tasks. The more hours you work; the more money you
earn.

 Salary: Similar to wages, this is money you earn from a job. Your annual
salary is usually set out in a contract and paid either weekly, fortnightly or
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 monthly, usually the amount is regular and you won’t earn more from extra
hours worked.

 Commission: Commission is where you earn money for completing a task.

This is common in sales roles. You might earn a set amount of money for
each sale you make or you might earn a percentage of sale price for your
work. Commission is based on result rather than time worked.

 Interest: Interest is something that your money earns for you. Interest is
usually paid on money that you have deposited with your bank. Interest
varies between account types and is usually expressed as a percentage per
year or per annum.
FACTORS THAT DETERMINE INCOME
1. Family Background: some people are born into wealthy family which
makes them to have large income
2. Availability of Productive Resources: People with large productive
resources such as land, labour, capital and entrepreneurial ability tend to
have large income if the resources are effectively utilized.
3. The Quality of one’s labour force: The higher the labour force, the higher
the income and vise-versa.
4. Market Power: People who through accident or design find themselves in
monopoly position tend to have large income.
CIRCULAR FLOW OF INCOME
Circular flow of income is the movement of money and other resources in an
economy for the demand and supply of goods and services from one sector to
another is like how water flow through the pipe or electricity through a circuit.
The national income flow for instance can be between the consumer and
producers. The household represent the consumer which demands for the goods
and services manufactured by firms that represent the producers. The firm
employ and organize factors of production or productive resources such as land,
labour, capital and entrepreneurial ability owned by the household. The
productive firms provide income to the households in the forms of rent, wages,
interest and profits for making use of their productive resources.

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 Consumer

Income
(payment Productive wages, rent Expenditure
For productive Resources Interest and Goods on goods
resources) Profit (Income)

Producer

Fig. 1: Circular flow of income

Factors That Bring About Changes in the Circular flow of Income

1. Withdrawal: This is part of the income that is not allowed to pass through
the normal channel of circular flow of income.
2. Injection: This form an increase in income of households or producers
outside their normal processes of selling productive resources and
manufactured goods
3. Taxes: It reduces the expenditures of household and firms on goods and
services
4. Saving: These are parts of income which are not consumed immediately and
they reduce both consumers and producer’s expenditures.

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Nature of land investment decision appraisal
Nature of land investment decision appraisal, looking at land itself, land
decisions, how the feasibility and viability studies plays role in land decision
and investment decision and types being stated with clear explanation. Its
objectives are to see how beneficial land investment decision is respectively to
land economics
Nature of land Investment Decision Appraisal

Going by the above stated topic, we first need to ask ourselves what Land is.

Oxford Advanced Learners' Dictionary defined Land as an area of ground,

especially of a particular type or used for a particular purpose e. g agricultural

land, industrial land, real estate etc. In economics, Land is a factor of
production and it is of immerse importance. Everything that we use can be
traced ultimately to land. It includes all that which is available and free of cost
from nature as a free gift to human beings. Land stands for all natural living and
non-living things which are used by man in production. Land is a passive factor
and it does not possess any ability to produce on its own without being utilized.
Modern Economists consider Land as a specific factor of production which can
be put not only to a specific purpose but to several other uses.

The UNCCD defines land as “the terrestrial bio-productive system that

comprises soil, vegetation, other biota, and the ecological and hydrological
processes that operate within the system” (Article 1 of the Convention).
Nature of Land
Land, in economics, the resource that encompasses the natural resources used in
production. In classical economics, the three factors of production are land,
labour, and capital. Land was considered to be the “original and inexhaustible
gift of nature.” In modern economics, it is broadly defined to include all that
nature provides, including minerals, forest products, and water and land
resources. While many of these are renewable resources, no one considers them
“inexhaustible.” The payment to land is called rent. Like land, its definition has
been broadened over time to include payment to any productive resource with a
relatively fixed.
In economics, land comprises all naturally occurring resources as well as
geographic land. Examples include particular geographical locations, mineral
deposits, forests, fish stocks, atmospheric quality.

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Land is considered one of the three factors of production (also sometimes called
the three producer goods) along with capital, and labor. Natural resources are
fundamental to the production of all goods, including capital goods. While the
particular role of land in the economy was extensively debated in classical
economics it played a minor role in the neoclassical economics dominant in the
20th century. Income derived from ownership or control of natural resources is
referred to as rent.
Land Decisions
Land use decisions are the actions with the greatest potential to affect a
community's land or people. In the words of the Oregon Supreme Court, a land
use decision is one that "has a significant impact on present or future land uses"
Feasibility and Viability Studies of Land

A feasibility study is the act of analyzing the project systematically to determine

if it is capable of being carried out successfully. It takes all of a project's
relevant factors into account—including economic, technical, legal, and
scheduling considerations—to ascertain the likelihood of completing the project
successfully. A land feasibility study takes into account all the features and
challenges of a plot of land to determine if building on it is practical.
A Viability study is an in depth investigation of the profitability of the business
idea to be converted into a business enterprise. The main reason for viability
study is to determine whether or not the Land in use or to be use can stand the
challenges to be thrown at it overtime.
Investment an investment is an asset or item acquired with the goal of
generating income or appreciation, it can be seen as such as an actual of
allocating resources usually money with the expectation of generating and
income. Investment us the asking or process of investing money for profit or to
allocate money with the expectation of a positive benefit or return in future.

Financially speaking, and investment mean an asset that is obtained with the
intention of allowing it to appreciate in value over time.

Categories of investment
1. Ownership investment
2. Lending investment
3. Cash equivalent

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Types of Investment
There are three (3) main types of investment which are as follows;
• Stock
• Bonds
• Mutual funds/ cash equivalent
Investment decision are concerned with the question whether adding in capital
assets today will increase revenue of tomorrow to cover costs. This investment
decision is commitments of many resources at different time on expectation of
economic returns in future dates.
Factors Affecting Investment Decisions

(i) Estimate of capital outlays and the future earnings of the proposed project
focusing on the task of value engineering and market forecasting,
(ii) Availability of capital and consideration of cost-focusing attention as
financial analysis, and
(iii) A correct set of standards by which to select projects for execution to
maximize return-focusing attention on logic and arithmetic.
Capital in terms of investment.

According to oxford dictionary, capital is wealthy in the form of money or other

assets owned by a person or organization or available for a purpose such as
starting a company or investing. In economics capital is a factor of production
which is the finance or money in starting up a business.
So, what are these sources of capital? They are as follows

1. Government grants:

Government offers grants through the SBA to entrepreneurs who have

research-related businesses. The most attractive benefits of grants is that it’s free
and no repayment is made
2. Crowd funding

3. Microloans

4. Venture capitalist

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Types Of Land Investment

They are different types of land investment but the main land investment are as
follows
1. Agricultural land investment

2. Real estate investment

3. Recreational land investment

4. Industrial land investment

Agricultural land investment:

Agricultural land investment talks about the land that is used for carrying
out agricultural activities like land used for row crops and planting, land used
for livestock raising, vegetable farmland, timber land for production of timbers
used for furniture’s, mineral production land, vine yards etc.
Real estate investment:

This mainly talk about land that are being developed to serve as either
residential or commercial purposes. The aim of this real estate investment is for
profit in terms of rents, profit from sale of properties. Furthermore, its
categories into
- Residential

- Commercial

- Industrial

- Retail

- Mixed-used

Recreational land investment:

As the name recreational implies land that is being used for recreation which
varies, for instance hunting, fishing, camping, amusement park (swimming
pools and garden).

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• Industrial land investment:

Industrial land investment is the land and buildings which accommodates

industrial activities including production, manufacturing, assembly,
warehousing, storage and distribution.
Investment Appraisal

Investment appraisal is the analysis done to consider the profitability of an

investment over the life of an asset alongside considerations of affordability and
strategic fit. Economic appraisal is a type of decision method applied to a
project, programme or policy that takes into account a wide range of cost and
benefits, denominated in monetary terms or for which a monetary equivalent
can be estimated.

The main types of economic appraisal are;

1. Cost-benefit analysis

2. Cost-effectiveness analysis

3. Scoring and weighing

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CONCEPT OF HIGHEST AND BEST USE OF LAND.
The highest and best use is one of the basic concepts in land economics, for
clarification of the topic “highest and best use”, it is paramount to know what
the keywords are.
The keywords of this topic are;
 Concept
 Highest
 Best.

 Concept: is a formed plan or idea on a particular subject.

 Highest: is the maximum level measure in/on a particular thing.
 Best: is the most suitable among various alternatives.
Definition of Highest and Best Use.
Highest and best use of land is when a land is utilized/used in such a
manner as to produce an optimum return to the operator or the user.
According to The Appraisal Institute, The Appraisal of Real Estate, 13th
Edition link, the highest and best use of a property is defined as:
The reasonably probable and legal use of vacant land or an improved
property that is physically possible, appropriately supported, and financially
feasible and that results in the highest value.
The Appraisal Institute has also defined a set of tests, known as The Four Tests,
that comprise the factors an appraiser must consider when determining the
highest and best use of a property. Each of these four tests can potentially be a
complex and detailed process, the details of which are beyond the scope of this
article, but the concept of each should be straight-forward. The Four Tests are
given below with brief explanations of each.
Legally permissible – Which use cases are permissible by law, zoning,
and other land use regulations.
Physically possible – Constructing buildings on the side of a mountain or
in a swamp probably are not possible.
Financially feasible – Does the use case of the property suit the
demographics and market of the area well?
Maximally productive – Does the intended use optimize the potential of
the land?
Intuitively, these four factors make sense. If a potential use is not allowed
by law and is not physically possible to construct on the given piece of land,
then that use case will likely not serve as the highest and best use for that
property. Likewise, if the use of the property doesn’t fit well within the
surrounding demographics and commercial activity it won’t be maximally

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productive, in which case a different use may realize more of the potential of
the property.

As mentioned above, each of The Four Tests could require significant

research and expertise to determine the outcome of the tests. Attorneys and/or
land use experts may be needed to determine the legality of a specific use case
for a property. Engineers may be required to determine the suitability of the
property for certain types of construction. And real estate experts will be
involved in determining whether the property is financially feasible and
maximally productive. While each of these tests is important, the remainder of
this article will focus on the financial feasibility of the property, with the
assumption that the analysis is being performed to determine the potential for
investment or development.
An important thing to note before continue is that the determination of
the highest and best use could require slightly different methods depending on
whether the property is vacant or already improved. Below, we’ll touch on the
distinction between the two, but we’ll attempt to describe the concepts more
generally for use on either a piece of vacant land or an existing property.
Investment and Valuation Analysis
The financial feasibility of a property relies heavily on market analysis.
Previous articles on market leasing assumptions and comparable property
analysis provide a more in-depth explanation of how to perform detailed market
analysis. Regardless of the use case of the property, there are some important
aspects of the market and the property’s place in the market that an analyst must
understand well. Many times an analysis will focus heavily on current market
conditions, but missing certain components of how the market might evolve
over time could significantly increase the financial risk of a property over the
hold period. Some of these factors are included below and described in more
detail.
Market Trends
Sales and leasing trends in both the market and submarket provide a lot of
information about the health of the market. Factors such as occupancy, lease
rates, and absorption are telling of the health of the leasing market, while
number of sales, price per square foot, cap rates, and time-on-market trends give
a good idea of how attractive the area is for investment returns.
Physical Attributes
Physical obsolescence can be a major impediment in a property reaching its
maximum potential. Whether that obsolescence is driven by a design that no
longer serves the current demographic, a lack of technological capabilities, or
some other reason, a property that no longer offers what the market demands
does not achieve its highest and best use.
Locational Attributes

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As cities change over time, some locations will become more valuable while
others become less valuable. The construction or improvement of new roads can
change the access dynamics of a property. A parcel of land off a major highway
that was difficult to access might prove to be a perfect location for a new office
park after a new access ramp was constructed. However, that very same access
ramp that provides more convenient commutes to one piece of land could mean
that another property becomes less attractive.
Current vs. Potential Performance
It’s also a good idea to analyze trends for multiple different property types to
determine whether or not there’s divergence between them. For example, for
many years the Financial District in downtown Manhattan was home to
numerous office buildings and headquarters to many companies. Over the years,
however, companies began to move to newer buildings in midtown Manhattan
and the office market in the Financial District began to decline. Developers then
stepped in and began to convert the office buildings into residential properties.
While office rents and occupancy were declining, the residential market was
improving significantly in the area. During this period the highest and best use
changed from office use to residential use, highlighting the fact that current uses
may not be the most valuable financial use for a property.
Competitive (or potentially competitive) Sites
Often analysis is weighted heavily on current properties in the market. While
existing properties definitely need to be factored into the analysis, sites (both
vacant land and existing properties) need to be considered for their potential for
development in the future. During real estate and construction booms, it’s not
uncommon to see substantial new development of raw land. The appraiser must
consider whether or not there is equally or better suited land nearby for the same
use case.
For example, let’s say a firm purchases a suburban office building in an area
with few office properties and healthy performance (stable occupancy), but the
area also offers numerous pieces of vacant land that are suitable for office
development. If, at some point in the future, a development boom comes to the
area and new office properties are developed, it could render the firms’ property
in lower demand with more stiff competition.
Cost of Modification vs. Existing Use
The previous factors (with the exception of market trends) could require a
significant monetary outlay for redevelopment or repositioning of a property.
An analyst will have to determine whether the potential increase in value would
exceed the cost of the modifications necessary to achieve the highest and best
use of a property. In the case that the cost of modifications would exceed the
increase in value, the current use would likely remain the highest and best use
of the property.
Financial Proformas

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All of the information collected about a property should be used to estimate the
financial performance by constructing discounted cash flows and calculating the
potential value. It can then be determined if the property is achieving (or is
close to achieving) the highest and best use.

Factors That Affect Highest and Best Use of Land.

1. Zoning ordinance: This is a situation whereby a land useful for a
particular purpose that will yield highest and best return has been zoned
for another purpose.
2. Laws: This include layout regulation, building bye law, environmental
impact guidelines etc, this are rules and regulations that hinder a land
being used as wanted.
3. Public policies
Therefore, highest and best use for any given land is that permissible by
law and also yielding the highest return, provided that the operator is
aware of all possible uses.
Types of Land Use That Earn Higher Return.
There are land uses that make their users earn higher return, such uses are;
1. Commercial land use: it is the use of land for buying and selling goods
for the purpose of income.
2. Industrial land use: This is a land utilized for production of goods for
people’s consumption with the aim of monetary return.
3. Agricultural land use: this has to do with the use of land for planting of
crops and rearing of animals for the use of man with the aspiration to gain
from it. Other land uses that bring about return include;
4. residential land use: built up land for renting out for the purpose of
income.
5. Utilities, facilities and services land use; this is usually done by the
government for people’s wellness and convenience but also serve as
revenue for the government.
Highest and best use of land return could be measured strictly on monetary
terms but it can also be measured on people’s well-being community facilities,
for instance, a portion of land available for two different utilities school and
clinic, here, consideration will be given to both utilities and the most needed one
for people’s well-being will be choose.
Factors to Be Considered in Land Utilization That Bring About Highest
and Best Use.
1. Physical/Biological factor: these are the features that either help or hinder
man in his use of land for highest and best use. The features include;
vegetation, Topography, sunshine, rainfall, water body etc.

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 2. Economic factor: This examine the influence of the economy on
individual or organization in an attempt to make profitable use of land, it
deals with man’s tendency to maximize land’s return. It’s the core focus
in land utilization for highest and best use.
3. Socio-cultural factor: this focuses on the role played by man in his Socio-
cultural environment. It pays attention to the impact of cultural attitudes,
norms and values, government programmes and policies, religious
beliefs. All those institutional factors have an impact on man to land
relationships.
4. Technological factors: Technological development also has an impact on
land utilization for highest return, it will be recalled that the steam engine
and other sources of energy freed man from coal site.
The technology innovation in pile and floating foundation turned
waterlogged areas that seems useless to useful resources.

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 The word term Employment
What is the definition of employment? In laymen’s terms, employment refers to
the idea that an individual has entered some form of verbal or written
commitment with an entity, known as the employer, under certain stipulations
such as payment, schedule
Define Employment: Employment means the act of being hired or employed
by a company or employer. Employment is an agreement between an individual
and another entity that stipulates the responsibilities, payment terms and
arrangement, rules of the workplace, and is recognized by the government.
Organizations use employment daily to fuel their businesses, expand, and
increase output. Employment requires that the individual be a legal citizen of
the country (Nigeria).
What types of employment are recognized under Nigerian law
Generally, employments in Nigeria fall within three categories and they are;
 Employment which is governed by statute;
 Employment by written contract of employment;
 Employment at will or servant holding an office at pleasure of
employer or Master and servant relationship.
a. Employment that is governed by statute
This is an employment with statutory flavour. An employment is said to have a
statutory flavour when the appointment and termination is protected by statute
or laid down regulations made to govern the procedure for employment of an
employee. The rules and regulations are part of the terms and conditions of the
employees' employment which gives it statutory flavour. For an employee to
effectively claim that his or her employment is coated with statutory flavour and
be terminated according to its provisions, the employment must;
 have statutory reinforcement or at any rate, be regarded as mandatory,
 be within the meaning of the relevant statute and directly applicable to
the employee or persons of his cadre,
 be seen to be protected under the statute; and
 have been breached in the course of determining the employment;
before the employee can rely on same to challenge the validity of the
termination of his or her employment.
b. Employment by written contract of employment

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A contract of employment is defined in Section 91 of the Labour Act as-
" any agreement, whether oral or written, express or implied whereby one
person agrees to employ another as a worker and that other person agrees to
serve the employer as a worker".
An employer is defined to mean "any person who has entered into a contract of
employment to employ any other person as a worker either for himself or for the
service of any other person and includes the agent, manager or factory of the
first mentioned person and the personnel representative of a deceased
employer".
In the same section, a worker(employee) is defined to be "any person who has
entered into or work under a contract with an employer, whether is for manual
labour or clerical work or is expressed or implied or oral or written and whether
it is a contract or service or a contract personally to execute any work or
labour..."
Section 3 of the Labour Act stated that an employer must give an employee a
written contract within 3 months of the commencement of the employment. The
contract must have certain key terms namely; name of employer and employee,
nature of employment, duration, wages, termination etc. The provisions of the
contract regulate the relationship between the employer and the employee.
c. Employment at will or servant holding an office at pleasure or Master
and servant relationship
An employment at will is when the employee holds an office at the pleasure of
the employer. As the name suggest, this is a form of employment held at the
will and caprices of the employer. Unlike employment with statutory favour, the
continuous engagement of the employee is at the discretion of the employer. For
example, a Minister of the Federal Republic of Nigeria is employed by the
President and therefore he or she holds that office at the pleasure of the
President. This also applies to the personal aides of the employer. One major
disadvantage of this type of employment is that loyalty of the employees is
usually to the employer not necessarily for the general wellbeing of the masses
or the business. The employer has a wide discretionary to "hire and fire".
What Factors Impact Employment?
1. Economic Factors Affecting Employment
National job growth, recessions and the ability to look for employment
could affect worker turnover and retention. For example, if the economic
climate is doing well and jobs are flourishing, it may be harder to retain
employees if they have other, better job opportunities to assess. On the
other hand, if the economic climate is poor and national unemployment
rates are high, it may be easier to retain your employees since other job
opportunities may be limited. Also, changes in consumer taste can affect
demand for the product or service your company provides, which could

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 lead to layoffs or mass hiring that could affect your company's
employment rate.
2. Technological Advances and Automation
Advances in technology can affect employment rates. For example,
certain industrial ventures previously requiring people to work on factory
lines may now be able to use computer-operated machines instead of
employees, depending on the industry. This may significantly decrease
the amount of employees needed in a company's workforce. Certain
technological advances in machine automation have also replaced the
need for specific levels of employees in office atmospheres, impacting
overall employment
3. Impact of Corporate Values
The corporate values that your company adheres to could impact your
employment rate. If potential employees, for example, hear negative
stories in the press about the way your company treats employees, this
could affect your recruitment process and what type of candidate you are
able to hire. If your employees feel unappreciated or unmotivated to work
for your company, this could also affect employment in that these
employees may leave for other ventures, or your company's production
levels could decrease and layoffs may need to take place.
Impact of Employment on Economic Growth and Development
In recent times, the significance of employment has rightly been reflected more
closely in the focus of economic development. Creating jobs (employment) and
incomes is crucial for development. Empirical studies highlight that economic
growth tends to be positively associated with job creation.
1. Employment contributes to economic growth and high employment means a
greater number of goods can be produced which will as well mean increase in
output, which can result to economic growth and development. Thus, an
economic recovery cannot happen unless companies begin hiring new
employees for skilled jobs and careers; therefore, lower unemployment will
reduce government borrowing and help economic growth.

2. If the unemployed gain work, they will increase spending, and this will cause
a positive multiplier effect, which helps to increase economic growth.
Employment causes sustained growth and sustained growth stimulates jobs and
contributes to lower unemployment rates which in turn reduces income
inequality.
3. Employment contributes to economic growth: Workers produce valuable
goods and services, and in turn receive a wage, which they can spend on buying
the goods produced. High employment means a greater number of goods can be
produced as well which means increase in output and productivity and inversely
leading to economic growth and development.

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 The world needs to focus on job creation (Employment) because jobs are
necessary to drive shared and sustainable economic growth. Although job
creation and economic growth are related, too often people falsely assume that
if you create economic growth, the jobs will follow.
Employment rate:
are defined as a measure of the extent to which available labour resources
(people available to work) are being used. They are calculated as the ratio of the
employed to the working age population. Employment rates are sensitive to the
economic cycle, but in the longer term they are significantly affected by
governments' higher education and income support policies and by policies that
facilitate employment of women and disadvantaged groups.
International trade
This is the same as foreign trade or external trade. International trade refers to
trade between two or more countries. It involves the exchange of goods and
services among different nations, for example, trade between Nigeria and other
West African countries. People, firms and governments of different countries of
the world are constantly exchanging goods and services across international
boundaries because no country produces all commodities required by its people.
It imports commodities which it cannot produce.
Types of International Trade
There are three types of international trade: Export Trade, Import Trade and
Ent repot Trade
Import Trade are goods and services bought from other countries. Import are
of two types - visible and invisible. Visible imports are tangible goods bought
from other countries. Invisible imports are services bought from other countries
e.g., banking, insurance, transportation services and payments made to foreign
investors.
Main Composition of Imports:
1. Consumer goods: food and drinks, textile and clothing, footwear, electronic
equipment etc.
2. Capital goods: building and construction materials, commercial vehicles and
spare parts, raw materials, machinery and industrial equipment.
3. Other goods: ammunition, medicine and medical equipment, books and
stationery, chemicals.
4. Services: Tourism and travel, transportation services, banking and insurance.

Export Trade refers to goods and services sold to others countries. Exports
could be visible or invisible. Tangible goods sold to other countries constitute
the visible exports. Invisible exports are services sold to other countries which
include banking, insurance and transport services, and receipts in form of
interest, profit and dividends from foreign investment.
Main Composition of Exports

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1. Agricultural products: Cocoa, rubber, groundnuts, coffee, timber, hides and
skins etc.
2. Manufactured/semi-manufactured products: groundnut oil, palm kernel oil,
groundnut cake.
3. Mineral products: petroleum, tin, columbite, coal.
4. Handicrafts items and artifacts.

Entrepot Trade is a combination of export and import trade and is also known
as Re-export. It means importing goods from one country and exporting it to
another country after adding some value to it. For instance, India imports gold
from China makes jewelry from it and then exports it to other countries.

Basis/Importance of International Trade

International trade takes place because of international division of labour. The
different countries specialize in the production of certain commodities, and so,
there is need for international exchange. Specialization and exchange have to
take place because of the following:
1. Differences in environment and endowment between the various
countries.
I. Differences in climate and soil: this account for the different types and
quantity of crops which are produced in different areas or countries.
II. Differences in available natural resources such as minerals: nature does
not distribute its resources evenly. Some countries have minimal
resources which are not found in some others. Countries that do not have
certain minerals buy them from those countries which produce them.
III.Differences in capital stock: some countries have a higher stock of capital
than others. Such countries with plenty of capital tend to produce more
goods and in greater variety. In countries with a low stock of capital, the
quantity and variety of goods produced are small.
IV. Differences in labour skills (or technical knowledge): there are
variations in the quality of labour. There are some countries where people
have acquired special skills in the production of certain commodities.
Example Germany is known for Mercedes Benz cars, Switzerland for
watches. Other countries buy from them.

2. The need to Satisfy certain wants: the above do not by themselves bring
about the international exchange of goods and services. Goods and services
have to be imported because the people, firms and government in the country
require them, and such commodities are either not produced at home or are not
produced in sufficient quantities. Trades take place because the countries are not
self-sufficient.

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3. The need to create a wider market for goods produced by a country:
sometimes, a country produces surplus commodities so that there is need to
export some to other countries. For example, all the electronic gadgets and cars
produced by Japan cannot all be consumed by her citizens. Also, a small
country like Kuwait cannot consume all her estimated crude oil reserves. Some
have to be sold to other countries.

4. Differences in cost of production of a commodity from one country to

another: this is because of differences in the combination of their endowments.
This implies that a country could import a particular type of good from another
country because it is cheaper to import it than to produce it at home.

Barriers to International Trade

1. Different in currency: most countries of the world have their national
currencies. This means that the trading countries may have different monetary
units. However, this problem is tackled by the use of foreign exchange rates.
The value of currencies is fixed in relation to each other.
2. Natural barriers: this includes distance, the presence of seas, deserts etc.,
separating the trade partners. Countries trading with each other may be
thousands of kilometer’s apart or may be separated by other natural barriers.
These lead to higher transport costs, and also goods may take several days or
weeks to reach their destinations. However, the development of modern means
of transportation and communication has gone a long way in facilitating
international transactions. More efficient ocean-going vessels, aircraft, railways
have been built.

3. Artificial barriers: there are several artificial barriers which constitute

problems to international trade. The government of various trading countries
may use trade restrictions such as tarrifs (charges) and embargo on imported
goods. Also there may be strict immigration laws. However, the development of
economic communities and the use of multilateral trade agreements tend to
foster international mobility of factors of production, goods and services.

4. Differences in law, customs, languages, standard of living and units of

weight and measures; creates some problems for international trade. The
problems of language and different units of measurement are being solved to a
large extent with the use of international languages such as English, French, and
the use of standard weights such as the metric system (meter, liter) and imperial
measures (inches, feet).

Advantages of International Trade

1. It leads to an increase in the total world output of commodities.

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2. It brings about a wider market for goods. Producers within the country tend to
produce more since their goods are sold in foreign markets.
3. International trade causes an increase in the standard of living
4. International trade has political benefits; it brings about the interdependence
of nations.
5. International trade provides job and employment opportunities for importers
and exporters.
6. It boasts competition, if suppliers have to compete more, they will work
harder to sell at lowest price and best quality possible.
7. It helps to speed up world economic growth and brings about social progress.
8. Transfer of technology increases thanks to international trade, the transfer of
technology goes from the originator to the secondary user (developing nation).
Disadvantages of International Trade
1. It may lead to too much dependence on other countries
2. It may lead to the collapse of infant industries and generate unemployment.
New companies find it much harder to grow if they have to compete against
giant foreign firms.
3. It may lead to excess production (overproduction) as a result of excess
specialization. It could lead to dumping of the commodities in other countries
which may discourage producers of such goods who are forced to sell at low
prices in foreign markets.
4. It may lead to the import of dangerous commodities and ideas.

Impact of international trade on employment

International trade has a great impact on employment rate of an economy
that has not achieved full employment especially in a third world countries or
developing countries like Nigeria. Therefore, international trade has adverse
effects on a countries economy with regards to employment which could either
be a positive or negative effects.
A. It provides source of employment to citizens of countries involved this
includes custom officers, exporters and importers of goods, people in charge
of shipment and unskilled labour force that are required in the offloading and
loading of cargos in containers.
B. It increases the country’s Gross Domestic Product (GDP) through foreign
exchange earnings. By imposing import and export duties, tariffs and taxes
levied on goods and services exported from the country. This increases the
countries revenue which can foster the creation of more job opportunities by
the government of the country involved in global trading.
C. It exposes the resources of the country where the commodities and services
which are traded internationally are produced to the foreign markets which in
turn attracts foreign investors to invest in the country thereby encouraging
producers to employ more labour force to increase production efficiency
which gives raise to employment in the country.

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D. It discourages infant industries as it gives raise to unhealthy competition
therefore causes less labour force to be needed in the production process of
commodities in that country thus causing the wounding up of the infant
industries resulting to the loss of employment of the employees and staff in
the developing nations that depend on importation.

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