DEVELOPMENTECONOMICS

TOPICONE:INTRODUCTIONTODEVELOPMENTECONOMICS
MEANINGOFDEVELOPMENTECONOMICS
COMPONENTSOFDEVELOPMENTECONOMICS
ROLEOFDEVELOPMENTECONOMICS

TOPICTWO:ECONOMICGROWTHANDDEVELOPMENT
MEANINGOFECONOMICGROWTHANDECONOMICDEVELOPMENT
CHARACTERISTICSOFDEVELOPINGCOUNTRIES
THEORIESOFECONOMICGROWTHANDDEVELOPMENT
FACTORSINFLUENCINGECONOMICGROWTHANDDEVELOPMENT
STRATEGIESFORECONOMICGROWTH

TOPICTHREE:POPULATIONANDDEMOGRAPHICFACTORS
MEANINGOFTERMSPOPULATIONANDDEMOGRAPHY
THEORIESOFPOPULATION
FACTORSINFLUENCINGPOPILATIONSIZEANDSTRUCTURE
IMPORTANCEOFPOPULATIONCENSUS
EFFECTSOFDEMOGRAPHYONDEVELOPMENT
IMPACTOFPOPULATIONCHANGEONECONOMICDEVELOPMENT

TOPICFOUR:LABOURMOVEMENT
MEANINGOFLABOURMOVEMENT
HISTORICALBACKGROUNDOFLABOURMOVEMENTINKENYA
ROLEOFTRADEUNIONISMINECONOMICDEVELOPMENT
ROLEOFEMPLOYERASSOCIATIONINECONOMICDEVELOPMENT
IMPORTANCEOFMANPOWERPLANNING

TOPICFIVE:EMPLOYMENTANDUNEMPLOYMENT
MEANINGOFEMPLOYMNTANDUNEMPLOYMENT
TYPESOFEMPLOYMENT
TYPESANDCAUSESOFUNEMPLOYMENT
MEASURESTOMANAGEUNEMPLOYMENT
ROLEOFCHANGEAGENTSNMANAGINGUNEMPLOYMENTPROBLEMS

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TOPICSIX:POVERTYANDSTANDARDSOFLIVING
MEANINGOFPOVERTYANDSTANDARDSOFLIVING
CAUSESOFPOVERTY
MEANINGOFNATIONALINCOME
FACTORSTHATINFLUENCENATIONALINCOME
METHODSOFMEASURINGNATIONALINCOME
DISTINCTIONBETWEENINCOMEANDWEALTHINEQUALITY
MEASURESTOOVERCOMEINCOMEINEQUALITIES

TOPICSEVEN:MONEYMARKET
MEANINGOFMONEYMARKET
IMPORTANCEOFMONEYMARKETINTHEECONOMY
ROLEOFNONBANKINGINSTITUTIONSINECONOMICDEVELOPMENT
EMERGINGTRENDSINMONEYMARKETS

TOPICEIGHT:PUBLICFINANCE
MEANINGOFPUBLICFINANCE
SOURCESOFGOVERNMENTREVENUE
PURPOSEOFTAXATION
TYPESOFPUBLICEXPENDITURE
IMPORTANCEOFFISCALPOLICY
ROLEOFBUDGETINPUBLICFINANCE
MANAGEMENTOFPUBLICDEBT

TOPICNINE:INFLATION
MEANINGOFINFLATION
TYPESANDCAUSESOFINFLATION
EFFECTSOFINFLATIONONECONOMY
CONTROLLINGINFLATION

TOPICTEN:INTERNATIONALTRADE
MEANINGOFINTERNATIONALTRADE
TERMSOFTRADE
BALANCEOFPAYMENTCOMPONENTS
DOCUMENTSUSEDININTERNATIONALTRADE
TRADERESTRICTIONS
TRENDSININTERNATIONALTRADE

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TOPICELEVEN:DEVELOPMENTPLANNING
MEANINGOFDEVELOPMENTPLANNING
TYPESOFDEVELOPMENTPLANS
CHALLENGESOFDEVELOPMENTPLANS
STRATEGIESOFINDUSTRIALIZATION

EMERGINGTRENDSINDEVELOPMENT
EMERGINGTRENDSINDEVELOPMENTECONOMICS

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TOPICONE:INTRODUCTIONTODEVELOPMENTECONOMICS
Economics:isthestudyofhumaneffortsinordertosatisfywhatappearstobeunlimitedandcompetingthr
oughcarefuluseofrelativelyscarceresources.
Itisthereforeasocialsciencethatstudiestherelationshipbetweenthescarceresourcesandthevarioususes
/needsthatcompetetheseresources.
ScopeofEconomics
Thestudyofeconomicsisdividedintotwogroupsnamely:
i. MicroEconomics
ii. MacroEconomics
MicroEconomics
 Isabranchofeconomicsthatstudies/
dealswithproblemsthataffectindividualunitsofeconomy.Itcausesproblemsofaparticularfirm/
industry,pricingofgoodsandservicesinamarkete.t.c.Itmainlydealswithproblemsofpricedetermin
ationandresource.
MacroEconomics
 Thisisabranchofeconomicsthatstudiesandhandlestheproblemsoftheentireeconomyingeneral.Itst
udiestheaggregatebehaviourwithunitoftheeconomyandproblemsthataffecttheeconomyasawhol
ee.g.unemployment,inflation,povertye.t.c.

DevelopmentEconomics
Isabranchofeconomicthatstudiesthevariousaspectsofthedevelopmentprocessespeciallyintheleastde
velopedareas.Itfocusesnotonlyonmethodsofpromotingeconomicgrowthandstructuralchangesbutal
soonimprovingthepotentialofthemass/
populationthroughhealthandeducationonworkplaceconditions.Itisconcernedwitheconomicandpoli
ticalprocessesnecessaryforeffectingrapidandinstitutionaltransformationoftheentiresocietyinamann
erthatwillmostefficientlybringthefruitsofeconomicprogresstothebroadestsegmentsofthepopulation
.
Itisconcernedwitheconomic,socialandinstitutionalmechanisms,bothpublicandprivate,necessaryfor
bringingaboutrapidandlargescaleimprovementinthelevelsoflivingforthemasses.

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ComponentsofDevelopmentEconomics
Developmenteconomicswilldealwithissuesthatwillhelptobringthefruitsofeconomicprogressinorde
rtoimprovetheleveloflivingforthepeopleandtheseincludeareassuchas:
 Industrialization
 Education
 Health
 Employment
 Governance
 Urbanization
 Research
 Trade

Significance/RoleofDevelopmenteconomicsinsociety
1. Distributesscarceresourceseffectivelyandefficientlyamongthecommunitysoastosatisfyeveryper
son’sneeds.
2. Improvesthelivingstandardsofpeoplebyensuringthatthereissatisfactionofwhatappearstobeunlim
ited.
3. Resourcesaremobilizedefficientlyandeffectivelyinordertobetterpeople’swayoflife.
4. Createsemploymentamongthecitizensthusabolishignoranceandpoverty.
5. Developsinfrastructuresuchasroads,electricitye.t.c.
6. Througheconomicdevelopment,healthinsocietieshasbeenimprovedwhichreducesmortalityrateo
fchildrenthusincreaseslifeexpectancy.
7. Createsabalanceindevelopmentthuseradicatesrural-urbanmigration.
8. Sincepeoplearesupposedtobegintheirchoice,developmenteconomicspropelssocialcohesionthus
promotesunityaboutrapideconomicgrowth.

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TOPICTWO:ECONOMICGROWTHANDDEVELOPMENT
Economicgrowth-Referstothechanges(increases/
decreases)inthelevelofoutput(amountofgoodsandservices)producedinaneconomywithinaperiodof
oneyeari.e.Itisanincrease/
decreaseinrealGrossDomesticProduct(GDP)andrealpercapitaincomeinanationoveragivenperiod.T
husitisaquantitativechangeinthevolumeofgoodsandservicesproducedandtheproductioncapacityofa
countryoveragivenperiodoftime.
N/
B:Anincreasewouldberealizedwhenthedemandofamountofgoodsandservicesinaparticularcountryi
ncreasesmoresteadilythanthenumberofpopulationgrowthandviceversa.

EconomicDevelopment-Referstoamulti-dimensionalprocessoftransformation/
changeinvolvingaccumulatedqualitativeandquantitativechangesinaneconomyleadingtobetterstand
ardsofliving,culturalchanges,economictransformation,educationreforms,andpoliticalrevolutionse.
t.c.Itisacontinuousprocesscoveringalongperiod;economicdevelopmentinvolveseconomicgrowthw
hicheventuallyleadstochangeinpeople’swayoflife,fairerdistributionofwealthandprovisionofessenti
algoodsandservicesthusimprovementoflivingstandards.

DistinctdifferencesbetweenEconomicGrowthandEconomicDevelopment
EconomicGrowth EconomicDevelopment
Involvesonlychangesinthequalityofgoodsand Involvesbothqualitativeandquantitativechan
services. ges.
Isarapidprocessthatoccurswithinashortperiod. Isaslowandgradualperiodsinceitinvolvessev
eralqualitativeandquantitativechangesinsev
eralsectors
Mayinvolveonlychangesinonlyonesectorofth Isamultidisciplinarychangeinvolvingmanys
eeconomy. ectors.

Maybeachievedthroughchangingthetechnolo Theremustbeachangeintechnologytoachieve
gybyextensiveuseofavailable economicdevelopment.
resources.

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Maynottransformpeople’swayoflife. Mustbringabouttransformationinpeople’sw
ayoflifethroughimprovementofpeople’slivi
ngstandards,culturalchanges.

CharacteristicsofaDevelopingnation
1. Lowstandardsofliving–
mostLDCsarecharacterizedbylowstandardsoflivingasnotedbypoornutrition,medicalcare,sanitar
yservices,poortransportandeducatione.t.c.
2. Lowlevelsofincome
Lowincomeleadingtolowpurchasingpowerandlimitedmarket,itisbecausemuchoflabourforceisenga
gedinagriculturewhichisthedominantsector.
3. Pre-dominanceofpeasantagriculture
Majorityofthepopulationsareengagedinagriculturewhichisthedominantsector.
Agricultureisunproductivesinceprimitivetoolsandmethodsofproductionareusedandproductionisdo
neatsubsistencelevel.
4. Weakindustrialsector
Theindustrialsectorissmall,weakandunderdevelopedduetocapitalconstraintsandpoorentrepreneuri
alabilities.
5. Underutilizationofresources
Mostofnaturalresourcesofthedevelopingcountriesareeitherunutilized,underutilizedormisutilized.T
hisisduetolackofknowledge,skills,capitalandmarket.
6. Highpopulationgrowthrate
Demographically,lowdevelopingcountrieshavehighpopulationgrowthrateduetohighbirthratesandd
ecliningdeathrates.Theyareassociatedwiththeproblemsofdependency,unemploymentandbalanceof
paymentproblems.
7. Lowlifeexpectancy
Thisisduetogeneralpoorlivingconditionse.g.poormedicalcare,poorfooddietse.t.c.
8. Conservatism
Culturally,thebehaviourofthemajorityisbasedontraditionalbeliefsandsuperstition.
Thecultureprohibitseconomicdevelopmentandacceptanceofnewideas.Womenaregenerallyunderpr
ivilegedastheyareconsideredinferiortoman.

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9. Poortechnology-
Thedevelopingcountriesusebackwardtechnologywithlittleuseofscientifictechniquesinproductio
n.
10. Lowliteracylevel:thereisabundantofunskilledlabourduetohighrateofilliteracy.
11. Highdegreeofindependence:thereisoverdependenceonexternalresourcesandtrade.
12. Shortageofentrepreneurialabilities.
13. Dualism:thereexistcontradictorysectorsi.e.traditionalandmodernsectors.
14. Lowproductivity:isassociatedwithlowlabourefficiencyandlowtechnology.
15. Poorinfrastructure:infrastructureispoorlydevelopedi.e.poorroads,poortransports.

Factorsinfluencingeconomicgrowthofacountry
1. Availabilityofnaturalresources
Whennaturalresourcesareavailableandproperlyexploitedtheneconomicgrowthwillberegisteredi.e.t
herewillbeanincreaseoftheoutputandviceversa.
2. Availabilityofcapitalstockandcapitalaccumulation
Increasedlevelofcapitalstockmayresultincapitalwideningandcapitalaccumulationwhichmayeventu
allyleadtoincreaseinlevelofoutputandviceversa.
3. Technologicalchanges
Advancementoftechnologysignificantlyraisestheproductivityoftheeconomyasitenablesworktobed
onefasterandleadstoproductionofbetterqualityofgoodsandservicesandviceversa.
4. Politicalstability
Astablepoliticalconditionisgoodforproductiontotakeplaceinaneconomythusmayresultinincreaseof
output.Instancesofpoliticalinstabilityhoweverwoulddiscourageproductionactivitiestobetaken.
5. Increaseinlevelofinvestment
Investmentsincreasetheproductivecapacityofaneconomythusleadingtohighgrowthandviceversa.
6. Governmentpolicies/interventions
Ifgovernmentpoliciesarethosethatencourageactiveeconomicgrowth/
productionaswellaspromotetheprivatesector(e.g.throughreducedlegalrequirements,lowtaxese.t.c.)t
herateofeconomicgrowthislikelytobehighandviceversa.
7. Availabilityofmarket

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Whenmarketisavailableandexpandingi.e.bothdomesticandexternalmarket,theoutputofproduction
willexpandleadingtoeconomicgrowthandviceversa.
8. Improvementintermsoftrade
Favorabletermsoftradeincreasestheproductivecapacityoftheeconomyduetohighgrowthleadingtohi
ghproductionandviceversa.
9. Existenceofgoodinfrastructure
Existenceofroads,powersupply,andstoragefacilitiese.t.c.enablesproductiontotakeplaceleadingtoou
tputincrease.
10. Idealpopulation-
Whenthepopulationsizeofacountryisideal,resourceexploitationincreaseswithincreasingmargina
lproductivitytherebyleadingtoeconomicgrowthandviceversa.

11. Industrialization
Asthestandardoflivingincreases,spendingongoodschangefromagriculturaltomanufacturedgoods.Si
ncetheopportunityforemployingmorecapitalandtechnologyaregreatestinmanufacturing.

StagesofeconomicGrowth
Therearebasicallytwoattemptstoclassifythepatternofeconomicgrowthaspassageofdefiningeconomi
cgrowth.Twostagesinclude:

TheMarx’sClassification(KarlMarx)
Hesawthesocietyaspassingthroughthefollowingstages:
 Primitivecommunismtoslaverytofederalismthroughcapitalismandfinallytosocialismandcommu
nism.
RostowsStages
 Heviewseconomicgrowthanddevelopmenttotakeplaceinstagesandattributedthistoananalogyofa
naeroplane.Henotedthatbeforeaplanefliesofftheground,itfirstpreparesinrunningintherunway,gai
nsspeedandtakesoff;gainsaltitudethenstabilizesinthesky.Hetherefore,callsthestagesofgrowthas:
traditional,preconditiontotakeoff/transition,drivetomaturityandhighmassconsumption.
i. Traditionalstage
Isthestageoftraditionalpeasantagricultureandisthefirstinthegrowthpath.

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 Ischaracterizedby:-
 Rudimentarymethods
 Agricultureisthedominantactivity
 Noindustrialization
 Lowrateofincomeleadingtolowsavingsandcapitalaccumulation.
ii.Pre-conditional/Transitionalstage
Isthestagewhensocietiesareinprocessoftransitioni.e.theperiodwhenthesocietylaysfoundationfortak
eoff.
Characteristics
 Thesocietystartstogetinfluencedbyexternalforces.
 Theideaoftheeconomyprogressspreads.
 Educationstartsspreading.
 Societystartstoimitatetheadvancedideas.
 Banksandotherfinancialinstitutionsstartappearingforsavings.
 Commerceandexternaltradewidens.
 Transformationofpeople’sbeliefs.
 Modestinvestmentinmanufacturingandcommunicationbeginstotakeplace.

iii. Takeoffstage
Involvesaseverehistoricaltransformationinsocietywheresocial,economicandpoliticaltransform
ationsareexperiencedintheeconomy.Isthestagewhentheobstaclestosteadygrowthareremovedlea
dingtoreductionofforeigndependence.Theforcesoftheeconomicprogressfromthemodernecono
micactivitiesexpandanddominatethesociety.
Characteristics
 Eliminationofallobstaclesofeconomicgrowthe.g.highpopulation,growthrate,traditionalcult
uralbeliefs.
 Savingsandinvestmentincreases
 Industriesandmarketexpands.
 Newtechniquesinproductionareintroducedinallsectors.
 Oneormoreleadingsectorsoftheeconomyemerge.

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  Theeconomyexploitsformerlyunusednaturalresources.
 Expansionoflabourserviceandmanygoodsareproducedthusincreasestheavailabilityofconsu
mers’choice.
 Increasedurbanizationandmonetization.
iv. Drivetomaturitystage
Isarelativelymoreadvancedstagethanthetakeoffstage.Isaperiodoflongsustainedeconomicgrowt
hwheremoderntechnologyisextendedtoalleconomicactivities.
Characteristics
 Newproductiontechniquesreplaceoldones.
 Highlevelofresearchanddiscovery.
 Newleadingsectorsarecreated.
 Savingsaresohigh.
 Developmentofmanyindustries.
 Labourandotherfactorsofefficiencyareadvancedhencehighproductivity.
 Importsubstitutionstrategyi.e.goodsformerlyimportedareproducedathome.
 Lowpopulationgrowthrate.
 Employmentopportunitiesincrease.
 Increasedlevelofsecondaryurbanization.
 Highlevelofinfrastructuredevelopment.

v. Highmassconsumptionstage
Isastageofhighconsumptionofgoodsandservices.Theleadingindustriesoftheeconomyshiftfromp
roducingmainlycapitalgoodstoconsumergoods.Theresourcesarefullydeveloped.
Characteristics
 Incomeofmajorityrisebeyondsubsistence
 Savingslevelisveryhigh.
 Labourishighlyskilledandexpensive.
 Socialwelfareandsecurityschemesareemphasizedasthesocietyprogressestowelfarestate.
CriticismofRostowsTheory

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 ThegrowththeorypostulatedbyRostowsisnotadevelopedstrategybutmerelyadescriptionofgrowth
anddevelopmentprocesswhichsimplyindicatesthattheprocessofeconomicgrowthisevolutionarya
ndgradual.
 ThoughRostowsdevelopedstagestoelaborateacceleratedgrowth,itisdifficulttodemarcateonestag
efromtheotherstageofgrowthi.e.thereisaconsiderableoverlappingbetweenthedifferentstages.
 Explainsthegrowthintermsofsavingshoweversavingsarenottheonlysourceofeconomicgrowthbut
otherfactorssuchaspoliticalstabilityetcalsocontributetoeconomicgrowth.
 Somecountrieshaveachievedhighsavings(say5-10%)buthavenevertakenoff.

TheoriesofEconomicGrowth
Economistshaveputforwardtheorieswhichcanbeusedtopromoteeconomicgrowth.Theseinclude:-
1. BalancedGrowththeory
ItwasformulatedbyRagnarNarksinhisarticle(theproblemofcapitalformationinunderdevelopedcount
ries).Thestrategygoesforsimultaneousinvestmentsinseveralindustries,projectsorsectorswhichwillc
omplimenteachothersothatwhereoneindustryalonewouldnotbeviablebecauseofsmallmarket,thelar
genumberofindustries/
sectorscanhelptosupporteachother.Itisbelievedthatbecauseoftheviciouscycleofpoverty,theremaybe
insufficientdemandtosupportoneindustrybutifmanynewindustriesaresetup,incomemayberaisedand
demandincreasessufficientlytosupporttheproductonindustryandotherindustries.Differentindustries
mightalsosupplyeachotherwithrawmaterialsorgenerateotherkindsofexternaleconomies.Thetheoryt
herefore,suggestssimultaneousinvestmentinlargenumberofmutuallysupportiveindustries/
sectorssothatthereisanequilibriumexpansionanddevelopmentofallsectors/industries.

CriticismofBalancedGrowththeorywithrespecttoDevelopingcountries
 Theideaofmutuallysupportingindustriesprovidingmarketforothersisself-
defeatingsinceitcallsforestablishmentofavastnumberofprojectssimultaneouslywhichmaynotbep
ossible.
 Sinceprojectsinlowdevelopingcountriesfacehighdegreeofuncertaintyplacinghighstakeofminimu
mcriticaleffortsimpliesveryheavylossincaseoffailureofprojects.
 Shortageofskills,trainedmanpowerandentrepreneurialactivitieslimittheefficientapplicationofbal
ancedtheory.

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 Lowdevelopingcountrieshavelimitedcapitalandresourcestosustainbalancedgrowth.
 Balancedgrowthimpliesoverrelianceonforeignaidwithassociatedproblemsindebtservicing.
2. UnbalancedTheory
 ProposedbyProfessorAlbertHirschmanwhosaidthatsincetypicaldevelopingcountriesfaceshortag
eofcapital,managerialabilitiesandentrepreneurialabilities,theresourcesavailableshouldbeinveste
dinallindustries/
sectorswhichhavemaximumeffectsontheeconomythroughlinkageswithotherpotentialsectors/
industries.
 Suchkeyindustries/
sectorswhichhavegotthehighestnumberofforwardandbackwardlinkagesarereferredtoasleadingi
ndustries/
sectors.Thustheunbalancedtheoryassertsthatinsteadofinvestmentsbeingmadeonabroadfrontasin
thecaseofbalancedtheory,itshouldbefocusedonthegrowingpointoftheleadingsectorswhicharevit
alandcanultimatelyleadtothegrowthofothersectors.
CriticismofUnbalancedGrowththeory
 Itdoesnotoffersolutionstotheproblemsofviciouscycleofpovertyinsmallmarket.
 Itadvocatesforspecializationwhichinvolvesrisks.Concentratingononeproduct/
asmallnumberofproductscanmakethecountrysuffercyclicalfluctuationsintheworlddemandandsu
pplye.g.ifthetasteofacommoditychanges,thecommoditywouldeventuallylooseitsdemandinmark
et.
 Maytriggerinflationaryproblemduetoinadequate/shortageinaggregatesupply.

3. Bigpushtheory
ItwasformulatedbyPaulRodeistenandcallsforacomprehensiveprogramthatenablesaneconomytoo
vercomeproblemsofunderdevelopment.Itassignscapital,centralroleintheprocessofeconomicgro
wthanddevelopment.Accordingtothetheorythereshouldbeaminimumlevelofresourcesthatmustbe
devotedtodevelopmentprogramsforeconomicprogress.Itthereforecallsforasuddensharpincreasei
ntherateofinvestmentsoastoachieveeconomicprogress.

CriticismsofBigpushTheory

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 Neglectstheeconomyfrominvestinginexportsindustryandimportsubstitutionindustries.
 Ignoresinvestmentinagriculturalsectorswhichisthedominantsectorinlowdevelopingcountries.
 Generatesinflationarypressurearisingfromthefluctuationsofpricesintheeconomy.
 Lowdevelopingcountrieslackcapitaltolaunchahighminimumamountinvestmentofsocialoverhead
whichisveryexpensive.

Strategiesforeconomicgrowthanddevelopment
 Industrializationstrategy-
thisaimsatcreationofindustriesintheeconomyforproductionofgoodsandservicesi.e.expansio
noftheindustrialsector.
 Populationcontrolpolicies-
aimatensuringanidealpopulationsizethatenablesoptimumresourcesexploitationtherebyincr
easingproductivity.
 Technologicaladvancement-
referstothemovementoftechnologyfromonecountrytoanotherespeciallyfrommostdeveloped
countriestotheleastdevelopedones.Itfacilitatestheexploitationofresourcesincreasingproduct
ivityandproductionofnewandbetterqualityproducts.

TOPICTHREE:POPULATIONANDDEMOGRAPHICFACTORS
Population:referstothenumberofpeoplelivinginaparticularareaataspecificperiodoftime.
Itincludesbothpermanentandtemporaryresidenceofaplace.
Demography:referstopopulationcomposition,patternsandstructuresintermsofage,sex,occupationa
ndsettlement.
Populationgrowthrate:referstothechangesinpopulationsizethatcanbebroughtaboutduetochangesi
nmigration,birthsanddeathratesandotherfactors.

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ThedifferencebetweenthecrudebirthrateandcrudedeathrateinacountrygivesastheNaturalpopulatio
ngrowthrate.I.e.CBR-CDR=NPGR
Populationexplosion:referstotherapidincreaseinpopulationinagivenarearelativetotheavailableres
ourcessuchthattheresourcescannotadequatelysatisfytheneedsofpeople.
Optimumpopulation:Itisthepopulationsizeandstructurewhichismostsuitableandconduciveforexpl
oitationofavailableresourcesoftheeconomy.Itisthepopulationsizethatprovidesthelabourforcethatw
hencombinedwithotherfactorsofproductione.g.capital,lande.t.cyieldsthemaximumoutputperworke
r/
averageoutput.Itoccursatalevelwheretheaverageoutputoroutputperheadofpopulationisatthemaxim
um.
Underpopulation:thisisthepopulationsizewhichistoosmalltoeffectivelyusetheavailableresourcesi
nanareasuchthattheaverageproductoflabourincreaseswithincreaseinpopulation/
workforce.Thispopulationsizefallsbelowtheoptimumlevelwherethereisinsufficientlabourtofullyex
ploittheexistingresources.
Overpopulation:isasituationwherethesizeofthepopulationexceedstheoptimumandavailableresour
cesisnotsufficienttosustainpopulationsizesuchthattheaverageproductoflabourdeclineswiththeincre
aseinpopulationsize.Itimpliesthatpopulationsizeistoolargetobesustainedbytheexistingresourcesan
dithappenswhenthepopulationsizeexceedsthecapacityofexistingresourcesatgivenparticulartechnol
ogy.
Anagingpopulation:thisisthepopulationstructureinwhichabiggerpercentageismadeupofoldpeople
.Maybecausedbythefallinthebirthrateandriseinthelifeexpectancy

Optimumlevel

Output/
product

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Underpopulationoverpopulation

Populationsize

Decliningpopulation:isasituationwherepopulationtrendistowardssmallerfamiliesandpeopletrytok
eepfamiliesassmallaspossible.Thisleadstothefallofthesizeofpopulation.
Populationcensus:referstotheenumerationofpeoplelivinginanareainagivenperiodoftimeinordertoe
stablishthevariousaspectsandstructureofthepopulationforplanningpurposes.

Importanceofpopulationcensus
1. Toestablishthecorrectsizeofthepopulation.
2. Todiscoverthedistributionofthepopulationandalsotoestablishpopulationdensitieswhichhelpinpl
anninganddistributionofsocialservicesandotherresources.
3. Helpstoestablishbothbirthanddeathratesthatareusefulinformulationofpopulationpolicies.
4. Toestablishthesizeoflabourforce,themiddleageoreconomicallyactiveandnumberofdependants(t
heold,themiddleage,theyoung).
5. Toestablishthequalityofthepopulationbyestablishingthelevelofeducationofpeople.
6. Toestablishrateofmigrationi.e.immigrants.
7. Todiscoverthesexcompositioninagivenpopulationinacountry(maleandfemale).
8. Toestablishtherateofunemploymentinacountry.
9. Toestablishtheextentofpopulationvariablessuchasdivorce,separation,migratione.t.c.forvariousp
urposes.

PopulationTheory
MalthusianPopulationTheory
 ItwasformulatedbyRev.MalthusThomas.Heexpresseshisworriesaboutrapidlyincreasingpopulati
oninhisessayonpopulationintheyear1798.Itstatesthatapopulationincreasesfasterthanfoodsupplya

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 ndifleftuncheckedmayleadtohumanmisery(stateofstarvation).Itpresupposesthatman’sbiological
capacitytoreproduceexceedshiscapacitytoincreasethefoodsupply.Itfurtherassumesthatpopulatio
ngrowsatGeometricrate/
progression(i.e.2,4,8,16,32…..)ifuncheckedcandoubleitselfevery25years.Foodsupplyhoweveri
ncreasesatarithmeticrate/
procreation(i.e.2,4,6,8,10……)duetotheoperationoflowdiminishingreturnsbasedonideathatthes
upplyoflandisfixedandthebestlandisusedfirstandworstiscultivatedlast.Atleaststepofpopulationgr
owth,Malthusarguedthattheamountoffoodproducedisoftenlessthanevenbeforeandthatatcertainp
ointintime;populationgrowthexceedsfoodsupply.Insuchasituationtheresourceswouldbeunableto
supportagivensizeofpopulationandanyadditionalpopulationislikelytostarvetodeath,leadingtoMa
lthusianpopulationtrap.
 Thepointatwhichtheproductionoffoodequalsthatofpopulationgrowthistermedpopulationtrap.

Population/population
Foodsupply
T

Foodsupply
Time(years)

ThepointTisthetermedpopulationtrapwherefoodsupplyisequaltopopulationgrowth.BeyondpointTi.
e.thesuggestedregionisastateofmisery(starvationanddeath).
Toavoidenteringmisery,hesuggestedtwochecksonpopulationgrowthrate:-
1. Negativeorpreventivechecks
Theyarevoluntarymeasuresaimedatcontrollingpopulationgrowthratebycontrollingthebirthratee.g.l
atemarriages,celibacy,restraints.
2. Positivechecks
Isinvoluntarycontrolmeasuresaimedatcontrollingpopulationgrowthratebyincreasingdeathrates:-
e.g.
 Famine

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  Diseases
 Wars
 Starvation
 Calamities

Factorsthatinfluencepopulationsizeandstructure
1. Thecrudebirthrate-Referstothenumberofbirthsperannumper1000ofpopulation
Itiscrudebecauseitonlyrecordslivebirthsbutdoesn’ttakeintoaccounttheinfantmortalityrate.Increasei
nthisratewillleadtoanincreaseinpopulationsizeandviceversa.
2. Thecrudedeathrate-
Referstothenumberofpeoplethatdieinacountryper1000ofpopulation.Itiscrudebecauseitdoesnott
akeintoaccounttheageofapersonwhodies.Ifthisrateislowthepopulationsizeissaidtobebigandvice
versaassumingotherfactorsareconstant.
3. Thereproductionrate
Itmeasuresthenumberofdaughtersthatanewborngirlwouldbearduringherlifetimeassumingthatherfe
rtilityrateandlifeexpectancyisconstant.Ifthenetreproductionrateishigh,thepopulationsizewouldbebi
gcomposingofmajoritybeingfemaleandviceversa.

4. Infantmortalityrate
Itrecordsthenumberofdeathsofchildrenbelowtheageof1yearexpressedasnumberof1000ofchildrenin
thatagegroupperannum.Iftherateislowthenitimpliesthatthepopulationsizewouldbebigandviceversa.
5. Fertilityrate
Itmeasurestheaveragenumberofchildrenbornperwomanduringheractivechildbearingyears(15-
45years).Ifthefertilityrateishighthenthepopulationsizeissaidtobebigandviceversa.
6. Marriagepatterns
Giventhatmajorityofbirthsaretomarriedwomen,thenumberofmarriageswilldirectlyaffectthepopulat
ionsize.Theageatwhichpeoplemarryalsoinfluencesthepopulationsizee.g.ifgirlsgetmarriedatyounge

18
ragethenthepopulationislikelytobehigh.Whenthepopulationalsohaspreferenceforbigfamilysizethe
nthepopulationsizeislikelytobebigandviceversa.
7. Migrationpatterns
Itrecordsthenumberandwayinwhichpeoplemoveintoandoutofacountry.Ifthenumberofimmigrantsis
morethanthenumberofemigrantspopulationsizewillbebigandviceversa.
8. Moralvalues-
Ifthemoralvaluesareobservedthenthepopulationsizewillbecontrolledandviceversa.

ImpactofpopulationchangesonEconomicDevelopment
EffectsofanAgeingpopulation
1. Leadstogreaterdependenceontheyoung;itreducesthelevelofsavingsintheeconomytherebylimi
tinginvestmentthusleadingtolowcapitalformation.
2. Itleadstoasmallsizeoflabourforce
3. Itleadsinchangesofpatternofproductionandconsumptionofgoods;sincemoregoodsareprodu
cedfortheold.
4. Itdecreaseslabourmobility;anageingpopulationislessmobileascomparedtoonedominatedbythe
young.
5. Leadstoshortageoflabourinnewindustries;economybecomesunabletosupplytherequiredlabo
urtoboththenewandexpandingindustries.
6. Itismoreconservativeandlessinnovative;itretardstherateofeconomicdevelopment,itmayleadto
problemofstructuralunemploymentduetothedemandfortheproductsofthoseindustriesengagedin
productionforyoungfallsthussomecategoriesofworkersmaybelaidoff.

EffectsofaDecliningpopulation
1. Itchangesthedistributionofwealthintheeconomy.
2. Itreducesthepressureonkeyresourcesofproductionsuchascapital,labour.
3. Itleadstoafallinaggregatedemandresultingintosmallermarketsthusaffectingthelevelofproduction
ofgoodsandservices.
4. Itstrengthensthegovernment’sabilitytoprovideessentialgoodsandservices.
5. Itreducesthechancesofunemployment;thesupplyoflabourwillbelow.

19
Impactofoverpopulation
1. Problemofinflation
Overpopulationcreatesimbalanceinforcesofdemandandsupplywheretheaggregatedemandexceedst
hatofsupplycausinginflationarytendenciesaspricesconstantlyrise.
2. Existenceofunskilledlabourforce-Theresources/
fundsmaynotbeadequateorenoughtomeetthetrainingneedsofthepopulationleadingtounskilledlab
ourforce.
3. Overexploitationofresources
4. Overstrainedinfrastructure
Overpopulationcausesheavystrainontheexistinginfrastructuralfacilitiese.g.watersupply,electricity,
roadse.t.c.whichcannotcopeupwiththehighdemand.
5. Landfragmentation;landshavebeensubdividedthuslessproduction
6. Rural-urbanmigration
Peoplemovefromruraltourbanareasinsearchforjobopportunities.Rapidpopulationincreaseintherura
lcentreforcespeopleoutofagriculturalsectorintourbanareasinsearchofgoodopportunities.
7. Leadstolowinvestmentlevel.

Effectsofunderpopulationineconomy
1. Resourceunderutilization
Underpopulationcreatesinsufficientlabourforcetofullyexploitandutilizetheexistingresourcesthusle
adingtolowoutput.

2. Lowaggregatedemandorlimitedmarket
Thedemandforgoodsandserviceswouldbelowtherebyreducingthesizeofmarketsintheeconomyform
ostgoodsandservices.
3. Lowinvestmentresultingtolowcapitalformation
Theassociatedsmallmarketsdonotstimulateinvestmentsinvarioussectorsoftheeconomyespeciallyth
eindustrialsector.Duetolowinvestmentlevel,capitalaccumulationremainslow,leadingtolowcapitalf
ormation.
4. Resultstounderdevelopedinfrastructure

20
Underpopulationdiscouragesinvestmentsonsocialandeconomicinfrastructuree.g.roads,schools,po
wersupplye.t.c.thisleadstounderdevelopmentoftheeconomyasawhole.
5. Sloweconomicprogress
Underpopulationslowsdownandmayaswellhindereconomicdevelopmentduetolackofpressureonres
ourcesandalsobecauseoflesscompetition.
6. Hightransportcosts
Underpopulationischaracterizedbythinpopulationdistributionthatinvolveshightransportcostshinder
ingtradewithinareasorregions.

TOPICFOUR:LABOURMOVEMENT
Theconceptoflabourmovementisusedtorefertotradeunionsorlabourunions,theirorganizationandope
rations.

TypesofLabourunions/tradeunions
1. CraftTradeunion
Thisreferstoanassociationofskilledworkerswhoperformthesamekindofworki.e.theyhavethesamesk
illse.g.KNUTe.t.c
2. Industrial/generalunion
Thisisanassociationofallworkersinagivenindustry/
economyregardlessofwhatjobeachperformandtheirqualificatione.g.COTU.

RolesofTradeUnions

21
1. Bargainswithemployerforhighwagesfortheirmembers.
2. Tonegotiateforfringedbenefitse.g.housing,medicalandhardshipallowances.
3. Theyprotectworkersagainstunfairtreatmentanddismissalbytheemployers.
4. Theyadvicethegovernmentonmajoreconomicpoliciesthataffecttheworkersintheeconomy.
5. Theynegotiateforimprovementfortheworkingconditionsandstandardoflivingoftheworkers.
6. Helpsettle/regulatedisputebetweenworkersandemployersaswellasbetweenworkersthemselves.
7. Theykeepinestablishingfriendlyrelationshipbetweenworkersindifferentindustries/sectors.

Roleofemployersassociations
Employersassociation:isaformalgroupofemployerssetuptodefend,representoradviseaffiliatede
mployersandtostrengthentheirpositioninsocietyatlargewithregardtolabourmatters.

Aimsofemployersassociation:
1. Toregulatetradeandcompetitionbymutualagreement
2. Toseekstatutoryprotectionintrade
3. Toprovideservicesinthefieldsofindustrialrelationsandpersonaladministration
4. Tolobbywithinthepoliticalarenainoppositiontosociallegislatione.g.minimumpaylaws,re
ducedhoursofworke.t.c.

Functionsofemployersassociation
 Provisionofaforumtoenableindividualemployerstoexchangeviewstodevelopandexpressp
olicies
 Representationofemployersintereststogovernmentsandotherpublicpolicymakingbodies.
 Communicationofemployersinterestandviewstothemediaandthecommunitygenerally.
 Provisionofspecializedservicestomembers
 Industrialrelationsactivitiesandservicestomembersincludingrepresentingemployersgener
allyandindividualemployersinconciliationandarbitrationproceedings.

Industrialrelations
Industrialrelationsareconcernedwiththeemployer-employeerelationsinindustry.

22
Significanceofindustrialrelations
Smoothindustrialrelationsareindispensableforthefollowingreasons:
1. Smoothindustrialrelationswouldhelpineconomicprogressofaneconomy.Soundindustrialrelation
sresultsinincreasedproductivitywhichisnecessaryforbringingrapideconomicdevelopment
2. Goodindustrialrelationshelpinestablishingandmaintainingtrueindustrialdemocracywhichisnece
ssaryforestablishmentofasocialistsociety.
3. Soundindustrialrelationsresultinsmoothcollectivebargainingonthepartofbothlabourandmanage
ment
4. Soundindustrialrelationswouldhelpthegovernmentinframingandimplementingvariouslawsperta
iningtolabour,forbiddingunfairpracticesofunionsandemployers
5. Goodindustrialrelationsresultinlessnumberofdisputesandgrievances,anditbooststhemoraleandd
isciplineofworkers
6. Goodindustrialrelationsresultinorderliness,effectivenessandefficiencyofeconomy.Unionsgain
morestrengthandvitality.Interunionrivalrygetsreducedconsiderably.

Objectivesofindustrialrelations
Industrialrelationsarebasicallyaimedat:-
1. Safeguardingtheinterestsoflabourandmanagementbysecuringthehighestlevelofmutualunderst
andingandgoodwillamongallthoseworkersandsectionsintheindustrywhichparticipateintheproc
essofproduction.
2. Avoidingtheindustrialconflictorstrifeanddevelopingharmoniousrelations,whichareabsolutely
essentialforimprovingproductivityandindustrialprogress.
3. Raisingproductivitytoahigherlevelbyreducingabsenteeismandlabourturnover.
4. Establishingandnursingthegrowthofindustrialdemocracybasedonlabourpartnershipinthesharin
gofprofitsandofmanagementdecisions,sothatanindividualcangrowtohis/
herfullestpotentialsandcontributetotheindustryaswellasacountry.
5. Eliminatingthepossiblestrikesandlockouts,byprovidingreasonablewages,improvedworkingco
nditions,andsettlingthegrievances.
6. Establishinggovernmentcontrolsoversuchplantsandunitswhicharerunningatsubstantiallossesa
ndthoseunitsproducinggoodsprohibitedinthepublicinterest.

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MANPOWERPLANNING
Manpowerisregardedasthequantitative/
qualitativemeasurementoflabourforcerequiredinagiveneconomy.Howeverinrelationtomayberegar
dedasestablishingobjectivesinordertodevelophumanresourcesinlinewithbroadobjectivesofanecono
my/anorganizationthusmanpowerplanningisaprocessbywhichthegovernmentofaneconomy/
managementofanorganizationensurestherightnumberandkindofpeopleattherightplacedoingtherigh
tthings/jobs.

SignificanceofManpowerplanning
1. Ithelpsinattainingtherightnumberofpersonsrequiredtocarryouttheorganizationalplansandactiviti
esinordertoachieveitsvariousobjectivesandthisalsoensurestherightflowandmaintainsthepaceofp
roduction.
2. Itaids/assistsinforming/
designingtrainingdevelopmentprogramsforthepersonnelbecauseittakesintoaccounttheeffectofa
nticipatedchangesintechnology,marketsandproductsonmanpowerrequirement.
3. Ithelpsinformulatingthemanagerialpromotionalplansaspartofthereplacementplanningprocess.
4. Itprovidesenoughopportunityforidentifyinganddevelopingmanagerstomoveuptheladder.

24
TOPICFIVE:EMPLOYMENTANDUNEMPLOYMENT
Employment:peoplearesaidtobeemployediftheyengageinsomeeconomicallyproductiveactivities
withthepurposesofearningincome/money.
Employmentcanbedividedintotwotypesmainly:-
i. Selfemployment/informalemployment
ii. Salaried/wageorformal.
Selfemployment/informal
Isasituationwhereanindividualworksforhimselftoearnincomewhichmaybeinformofprofits,interest
orrent.
Salaried/wageemployment
Isasituationwhereanindividualsellshis/herlabour/servicetoanotherandispaidwage/salary.
Employmentrate
Referstothetotalnumberofpeopleemployedexpressedasapercentageofthetotalnumberinaneconomy.
EmploymentRate(ER)=TotalnumberofEmployees*100%
Totalnumberofpopulation
Unemployment-
Isasituationwherelabourforceisidleattheongoingmarketwageratesi.e.isasituationwhereanindividua
liswillingtoworkattheexistingmarketwageratebutcannotfindajob.
Unemploymentrate
Referstothetotalnumberofpeopleunemployedexpressedasapercentageofthetotalnumberofpeoplein
aneconomy.

Conceptofunderemployment

25
Isassituationwherelabourisnoteffectivelyemployedtoitsfullpotentialleadingtounderutilizationofthe
workersabilityorpotential.
Therearetwocategoriesofunemploymentnamely:
1. Involuntaryunemployment-
thisisasituationwheremembersofthelaborforceareidleandwillingtoworkbutareunabletofind
workattheexistingsituationandongoingmarketwagerate.
2. Voluntaryunemployment-
thisisasituationwherejobsareavailablebuttheindividualsdonotwanttoworkattheongoingmar
ketwagerate.

Causesofvoluntaryunemployment:-
 Laziness-
peoplewhoarelazyhateworkandprefertoremainunemployedevenwhenthejobsareavailable.
 Availabilityofsociallyunacceptablejobs
 Accumulationofpastsavings
 Lowwagerate/poorremuneration
 Existenceofgoodeconomicbackgrounds
 Expectationsofbetterfuturejobs
 Beingtooqualifiedforthejobs
 Unfavourablegeographicallocationofjobs
 Desireforleisure
 Poorworkingconditions
 Highrisksininvolvedindoingthejobs

Generalcausesofinvoluntaryunemployment:-
 Rural-
urbanmigration;whenpeoplemovefromruraltourbanareas,thedemandforjobsexceedthesupp
lyforjobsintheurbanareascausingopenurbanunemployment.
 Seasonalvariationineconomicactivitiesespeciallyintheagriculturalsector
 Naturaldisabilities

26
  Highpopulationgrowthrate
 Inappropriateeducation
 Labourimmobility
 Technologicalchanges
 Structuraladjustmentprogrammes
 Lowrateofinvestments
 Declineindemandforproducts

Typesandcausesofunemployment
1. Cyclicalunemployment
Isatemporaryunemploymentcausedbylackofaggregatedemandduetoeconomicrecessions/
depressions;alsoreferredtoasdemanddeficiency/Keynesiansunemployment
2. Structuralunemployment
Itarisesduetolackoffactormobility.Ifthedemandforaspecificfactorinitspresentoccupationfallsthens
uchfactorbecomesunemployed.
Structuralchangesmayresultdueto:-
a) Changesindemandresultinginchangesinconsumers’tastesandpreferencethatleadtochange
sincompositionofgoodsandservicesproduced.
b) Changesinsupplycausedbylackoffactorsofproduction.
c) Changesintechnology:iftheyresultintheuseoflaboursavingtechniquesasthoseoflaboursavi
ngmachinesmayrenderworkersredundant.
3. Frictionalunemployment
Isasubcategoryofstructuralunemployment.Itarisesbecauseofthetimelagsoccurringinthefunctioning
ofthelabourmarketandwhichareinevitableinafreemarketeconomyforinstancethedelaysinmovingfro
monejobtoanother.
4. Seasonalunemployment-
Occursonaregularbasiswhenworkersarekeptoutofemploymentatregularintervalsofperiod.Itisca
usedbyannualregularvariationofseasonsandmainlyaffectsagriculturalsectorandotheroutdooracti
vitiese.g.tourism,constructions.
Indevelopingcountries,thistypeofunemploymentiswidespreadinagriculturewhereperiodicchangesi
nweatherrenderslabouridleespeciallyafterharvestingandplanting.

27
5. Residualunemployment-
Referstounemploymentduetomentaldisabilityofthoseconcerned.Thesolutiontothistypeliesinthe
provisionofspecialeducationaltrainingtothedisabledpersonsandotherspecialpackagesoftheaffir
mativeaction.
6. Disguisedunemployment-
Occurswhentheworkavailablegiventhelabourforceisinsufficienttokeepitfullyemployedsothatso
memembersoftheworkforcecouldbewithdrawnwithoutanylossofoutput.Occurswhenthemargina
lproductoflabouriszero

MeasuresandManagementofunemployment
1) Fiscalpolicy
Thereshouldbeadequateexpenditure(publicandprivate)topreventdeficiencyofdemand.Inthiscase,th
eGovernmenthasthedutyofactivelystimulatingdemandthroughpublicinvestmenttosupplementthein
adequateprivateinvestment.Thiscanbeachievedthroughexpansionaryfiscalpolicywherethegovern
mentadoptsfiscalpolicybydecreasingtaxes,providingsubsidiesandincreasingitsexpenditureandutilit
iessothatinvestmentincreasesandmorejobsarecreated.
2) Expansionarymonetarypolicy:theattemptbythegovernmenttoadoptpoliciestoincreasemoneys
upplyinaneconomy.Whenthegovernmentadoptsexpansionarymonetarypolicye.g.byreducingint
erestrates,reducinglegalreserverequiremente.t.c.Moremoneyisavailableinthehandsofbothconsu
mersandentrepreneursandtheyareencouragedtoborrowmoremoneyfromcommercialbanksforinv
estmentpurposeswhichinturnincreasesjobopportunities.
3) Populationcontrolpolicies:toreducepressurewhichpopulationexplosionexertsonemployment,t
hegovernmentcanadoptpopulationcontrolmeasuresinawaytoreduceunemployment.
4) Trainingprogramsforworkers;thegovernmentcanprovidecontinuoustrainingprogramsforwor
kerssothattheycanhaveavarietyofskillsthatenablesthemtochangeemploymentduringperiodsofstr
ucturaladjustment.
5) Manpowerplanning:thegovernmentcanensurethatonlyrelevantskillsthataredemandedandthera
teoflaboursupplyrequiredintheeconomyisproducedinagiventimeperiod.Thishelpsinensuringbal
ancebetweenthedemandandsupplyintheeconomy.

28
6) Diversificationoftheeconomy:thegovernmentcanintroducetotheeconomyavarietyofeconomica
ctivitiestobeundertakensoastoreduceseasonalunemployment.
7) Industrializationstrategy:sinceindustrieshaveahighrateofjobcreation,thegovernmentcanenco
uragetheexpansionoftheindustrialsectorbyboththelocalandforeigninvestors.
8) Technologicalimprovementandadoptionofappropriateintermediateandappropriatetechn
ology:thegovernmentcanimproveonthestateoftechnologytoreduceoverrelianceonnaturewhosev
ariationcausesseasonalunemploymente.g.introductionofirrigationsystem.Thegovernmentcanals
oencouragetheadoptionoftechnologieswhichareemploymentcreativee.g.labourintensivetechnol
ogieswhichprovidejobopportunitiestoworkers.
9) Provisionofcreditfacilities:thegovernmentcangivecreditfacilitiestopotentialinvestorstocreatee
mploymentopportunitiesandalsotoencourageselfhelpprojects.

29
TOPICSIX:POVERTYANDSTANDARDSOFLIVING
Povertycanbedefinedintwoways:
 Absoluteterms
 Relativeterms

Absoluteterms–
wedefinepovertybypickingacertainperiodincomelevel(10,000p.m)andsaythatanyfamilyorindividu
alwhoseincomefallsbelowthislevelissaidtobelivinginpoverty.
Relativeterms-
wedefinepovertybyrankingindividualincomeearnersandsaythatanyfamilyorindividualthatfallinthe
bottom10%oftheincomeearnerspertherankissaidtobelivinginpoverty.
Generallypovertycanbedefinedasinabilitytoacquirethebasicneedsinone’slife.

Standardsofliving
 Peoplerequirebasicneedsintheirlives(shelter,clothingandfood)andothersupport-
needs(education,healthcaree.t.c.).Theextenttowhichanindividualisabletoobtaintheseneedswilld
eterminehis/
herstandardsofliving.Withimprovedincomedistributionamongindividualstheywillbeabletoacce
ssbetterhousingfacilities,educationandwelfareservicesaswellasclothingandfeedinghabits.Lowst
andardsoflivingarecloselyassociatedwithpovertyandthereforeattemptstoeliminatepovertywould
raisethelivingstandardsofpeople.
Povertyline
Isthedividinglinebetweenthoseconsideredpoorandthosenotofficiallyconsideredtobepoor.

30
Thelineidentifiestheincomebelowwhichpeopleareconsideredtobelivinginpovertyandthereforeindi
vidualsorfamilieswithincomebelowthelineareconsideredtobepoor.

Causesofpoverty
Thecausescanbeattributedtothevariousfactorsthatleadtounequaldistributionofincomei.e.betweenva
riousgroupsofpeopleorindividualorregionsinaneconomy.
1. Unequalregionaldistributionofnaturalresources
Theimbalanceofregionalnaturalresourcesendowmentimpliesthatpeoplewhohaveaccesstothenatura
lresourceswillacquiremoreincomethanthosewhohavenoaccessatall.

2. Differenceinskillendowment
Sinceskillsdependonthelevelofeducationthehigherthelevelofeducationthehighertheskillsandviceve
rsa.Skilledpeople(doctors,engineers)earnhigherincomethanunskilledcausingincomeinequalitythat
mayleadtopoverty.
3. Personalincomedistribution
Itreferstothepatternofincomedistributionaccordingtotherelativesizeofthepeopleincome.
ThecomparativeanalysisisbestshownbyLawrencecurveasshownbelow:

Thebottomaxis(x)showshouseholdsdividedintofiveequalgroupsaccordingtotheincomereceived.Th
everticalaxis(y)showsthepercentageoftotalincomeearnedbyeachgroup.
Perfectequalitydistributionofincomewouldberepresentedbydiagonalstraightlinefromlowleftcorner
torightleftcorner.Theextenttowhichtheactualdistributionshownvariesfromthediagonalstraightlinei
ndicatestheextentofinequalityofincomedistribution.Themorethecurvebowsawayfromastraightlinet
hegreatertheinequalityofincomethusleadingtopoverty.

31
4. LevelofWealth
Incomesalsotendtovarybecausesomepeopleinacountryorinaneconomymayownmorewealththanoth
ers,whichhasanimpactontheirabilitytoearnincome.Thosewhodonotownwealthmaybeconsideredpo
orbecauseoftheirlimitedabilitytoownwealth.
5. Discrimination
Itinfluencesthedistributionofincomeandoccursonthebasisofgenderandethnicity.
Forexample,womenmaynotbepromotedtoexecutivepositionsincertaincompaniesororganizationsbe
causemenbelievethattheycannothandlethosepositions.Certainunionsalsodenyimmigrants/
ethnicminoritymembersonthegroundsthatcertainethnicgroupsdonotbelongtocertainprofessions.
6. Ability/talents
Somepeopleearnmoreincomebecausetheyhavecertainnaturalabilitiesthatwhenexploitedwouldenha
ncetheirpotentialtoacquirecertainlevelofincome.
7. Monopolypower
Thedegreeofmonopolypowerheldbycertaingroupswouldalsodeterminethedifferenceinthedistributi
onofincomee.g.tradeunionshaveconsiderablepowerandtheyhavebeenabletoobtainhighwagesandbe
tterworkingconditions.

Otherfactorsare:-
i. Unequalaccesstofinancee.g.loansorgrants
ii. Differencesinemploymentinsomejobsaremorepayingthanothers.
iii. Agedifference
iv. Effectsofinflation
v. Politicalfavoritism
vi. Unequaldistributionofsocio-economicinfrastructuresuchasschools,hospitals,factories.

NationalIncome
Isthemeasureofthetotalmoneyvalueofallgoodsandservicesarisingfromtheproductiveactivitiesofana
tioninanycountryinagivenperiodusuallyoneyear.
N/
B:Nationalincomeismeasuredinmonetaryterms,howevertheinterestisinthevalueofthecommodities
producedandthemoneyitself.

32
DescriptionofNationalincomefigures
Whenmeasuringnationalincome,itcanbeexpressedinthefollowingways:
1. TheG.D.P(GrossDomesticProduct)
Thetotalmonetary(moneyvalue)ofallthefinalgoodsandservicesproducedwithinaterritorialboundary
ofacountrybyboththenationalsandnon-
nationalsoveragivenperiodoftimeusuallyoneaccountingyear.

2. TheG.N.P.(GrossNationalProduct)
Isthemeasureofthemoneyvalueofallgoodsandservicesproducedbyallthenationals/
citizens(bothwithinandabroad)duringagivenperiodoftimeusuallyoneyear.
N/B:Itexcludesthevalueofoutputbynon-nationalswithinthecountry.
G.N.P=G.D.P+Income
ThuswecancomputeG.N.PfromG.D.Pas:-
G.N.P=G.D.P+Incomeearnedbynationalsabroad–incomeearnedbynationalwithinthecountry.
3. TheNNP(NetNationalProduct)
IsthemeasureoftheNetMonetaryvalueofgoodsandservicesproducedbythenationalsofacountryafterr
emovingamountorvalueneededtoreplacetheassetswornoutinprocessingorproducingtheoutputinagi
venperiodoftimeusuallyoneyear.
ItisderivedfromGNPas:-
GNP;NNP=GNP–Capitalallowance(capitaldepreciation)
4. NetDomesticProduct(NDP)
Istheactualmonetaryvalueofgoodsandservicesproducedwithinacountrybybothnationalsandnon-
nationalsinagivenperiodoftimeafterremovingtheamount(value)neededtoreplacepartsofthecapitalas
setswarnoutduringtheproductionprocess.
NDPisobtainedbydeductingfromGDPthecapitaldepreciation.Itcanbecomputedas:-
NDP=GDP-CapitalAllowance
5. Nationalincome(NI)
Iscomputedbysubtractingallindirectbusinesstaxesexcepttheco-
operateprofittaxfromtheNetNationalProduct.
NI=NNP-Allindirectbusinesstaxesexceptcooperativetaxesplussocialsecuritycontributions.

33
 ExamplesofIndirecttaxes
Excisetax
Salestax
Importduty
Propertytax

PersonalIncome(PI)
Isthetotalamountofincomethatgoestoconsumersbeforeindividualtaxesaresubtracted.Tomovefrom
NItoPIfourmajoradjustmentsmustbemade.
a) Incomethatdoesnotgototheconsumersmustbesubtractedfromnationalincomee.g.retainedearnin
gs(undistributedcooperateprofits)
b) IncometaxespaidbycooperativetotheGovernmentmustalsobedeductedfromnationalincome.
c) Socialsecuritycontributionsmustalsobesubtractedfromnationalincomee.g.NHIF,NSSFetc.
d) Youaddallgovernmenttransferpayments.
7. DisposablePersonalincome(DPI)
Referstothetotalamountofincomethattheconsumer-
sectorhasatitsdisposalaftertheindividualtaxes(PAYE)hasbeendeducted.
PI=PI–personalincometaxes(PAYE)

MethodsofmeasuringNationalIncome
Therearethreemethods/approachesusedtomeasurenationalincome.
i. Output/productapproach
Inthismethodnationalincomeismeasuredbytakingthesummationofallthetotalmonetarycontributions
madebyvarioussectors.Toavoiddoublecountingonlythe‘valueadded’byeachsector/
businessenterpriseateachsuccessfulstageofproductionshouldbeincludedandthusconsidersvaluesof
onlythefinalproducts.ThismethodpresentsNIasthetotaloutputfromdomesticallyownedresourcesdur
ingthecauseoftheyear.ItiscommonlyusedandgivestheGDPofthecountry.
ii. Expenditureapproach
Itmeansthetotalexpenditureincurredonfinalgoodsandservicesproducedbyfirmsandindividualsdurin
gthecourseoftheyearandisgivenas:

34
 NI=C+I+G+XM)
Where:C–consumptionExpenditure
I–Investmentexpenditure
NI–Nationalincomeexp
G–Governmentexpenditure
X–Expenditurebynationalsfromexports
M–Expenditurebynationalfromimports
ItgivestheNIatthemarketprice.

iii. Incomemethod/approach
Inthismethod,nationalincomeismeasuredasasummationoftotalfactorincomepaymentsinthecausing
ofproducingtheoutputwhileexcludingthetransferofpayment.
Itisexpressedas;
NI=W+I+RII
WHERE:W–Wagesonlabour
I–Interestoncapitalassets
R–Rentonland
II–Profitpaidtoentrepreneur
Itpresentsnationalincomeintermsofincomeearnedbyfactorsofproductionengagedinproducingtheou
tput.
Itgivesnationalincomeatfactorcause.

Determinantsofthesizeofacountry’snationalincome
1. Availabilityandexploitationofnationalresources.Thesizeofnaturalresourceavailabilityandthe
levelofitsexploitationdeterminethesizeofacountry’snationalincome.Iftheseresourceswhichinclu
deallgiftsofnaturearelargelyavailableandhighlyexploitedthenthesizeofnationalincomewillbebig
andviceversa.
2. Sizeofthecapitalstock
Ifthesizeofthecountry’sstocksuchasfactories,machinesorequipment,privateandsocialcapitalusedto
produceotherassetsislarge,thenthesizeofnationalincomerisesthroughmassive/
extensiveproductionandviceversa.

35
3. Leveloftechnologicaladvancementofacountry
Advancedtechnologyleadstohighergrowthofnationalincomethroughmassiveproductionandvicever
sa.

4. Thelevelofhumanresourceavailability
Alargenumberofhighqualityorskilledworkingpopulationleadstoabiggersizeofincome,thanwhereth
equalityandthesizeoflabourforcearelow.
5. Theinvestmentlevel
Ifthelevelofbothdomesticandforeigninvestmentishighthenthesizeofnationalincomewillbebigandvi
ceversa.
6. Governmentwillandincentives(attractivepolicy)
Ifthegovernmentorpoliticalwillispositivewithregardtoresourcesutilizationandwheretheprivatesect
orisstrongthenthesizeofnationalincomewillbebiggerandviceversa.
7. Politicalstability
Conducivepoliticalatmospheremakesitpossibleforinvestmentandproductiontotakeplaceinacountry
leadingtogrowthinthesizeofnationalincomeandviceversa.
8. Thelevelofmarketsize
Acountrythathaslargerdomesticandexternalmarketwillhaveabigsizeofnationalincomeandviceversa
.
9. Thelevelofindustrialization
WherethelevelofindustrializationishighandtheTOTisfavourable,thesizeofnationalincomewillbeinc
reasedandviceversa.
10. Thepopulationgrowthrate
11. Thecultureandattitudeofpeople
12. Entrepreneurialabilities

GeneralproblemsofmeasuringnationalincomeinLDCsespeciallybyGDP
TheproblemsfacedwhenmeasuringnationalincomeinLDCsareeitherconceptualorstatistical.Concep
tualproblemsarethosethatarerelatedtothesubjectmatterofnationalincomeandrelatethedetermination
ofitemsforinclusioninthenationalincomefigures.Statisticalproblemsontheotherhandarethosethatare
facedduringtheprocessofdatacollection

36
Theproblemsgenerallyincludethefollowing:-
1.Boundaryofproduction;itisdifficulttodeterminewhichgoodsoractivitiesshouldbeincludedorexcl
udedfromthenationalincomestatementse.g.prostitution,gamblingetc.
2.Doublecounting;thisproblemarisesfromthefailuretodistinguishbetweenfinalandintermediatepro
ducts.Someitemscanbeincludedintheestimatesmorethanonce.
3.Inadequatestatisticalinformation;thereisalwaysinadequateinformationbecausefewentrepreneu
rsandconsumerskeepaccurateinformationaboutwhattheyproduceorconsume.
4.Pricechanges;thealwaysprevalentpricechangesaffectthevalueofnationalincomesuchthatwhenth
egeneralpricelevelintheeconomyrises,thenationalincomeshowsanincreaseeventhoughtherealprodu
ctionofgoodsandservicesmayhavefallenandviceversa.Itisverydifficulttoadjusttheeffectsofinflation
.
5.Omittedmarkettransactions;intheeconomy,notalltransactionswhichtakeplaceareincludedinthe
nationalincome.Onlythosethatresultfromproductiveeconomicactivitiesarerelevantwhencompiling
NY.Thosewhichareunproductiveareexcludede.g.transferpayments,capitalgainsetc.makingadjustm
entsforsuchexclusionisalsoaproblemwhencompilingnationalincome.
6.Determinationofincomefromabroad;itisdifficulttodeterminethenetincomefromabroadsinceim
portandexporttradearecarriedoutbymanypeopleorgroupsofpeoplewithlittledataavailabletoverifyth
eamountimportedandexportedbyprivateindividuals.Thereisalsoadditionalproblemofnon–
disclosure.
7.Inadequateskilledmanpower;inLDCsthereislackofsufficientskilledmanpowertodotheexercise.
Thereisashortageofqualifiedandexperiencedpersonaltocollectdataeffectively.
8.Determinationofdepreciationallowances;itisdifficulttomeasuresoastodeterminethenetincome
becausefirmsusedifferentmethodstomeasuredepreciationwhichmakesnationalincometoexactbutan
estimate.
9.Timingofproduction;itisdifficulttodeterminetheoutputproducedinacountryduringtheyeare.g.cr
opsmaystayinthefieldformorethanoneyearandthereislikelihoodthattheymaybecountedwhentheywe
reproduced.
10.Inadequatefacilities;facilitieslikecomputerstocollectandanalyzedataarenotsufficientlyemploy
ed.

37
11.Subsistenceproduction;thisproblemarisesbecausetherearesomegoodsandserviceswhichpeople
prefertoprovideforthemselves.Itisdifficulttogetthevalueofsuchoutputwhichisnotofferedtothemarke
t.

Percapitaincomeasanindexforstandardofliving
Percapitaincomereferstoaverageincomeperindividualinacountryatagivenperiodoftime.Itisgivendiv
idingthecountry’stotalincomebyitstotalpopulationi.e.
Percapitaincome=TotalNationalIncome
Totalpopulation

Shortcomingsofpercapitaincomeasanindexofstandardofliving
1.Itignoresthedistributionofgoodsandserviceswhichisotherwiseveryessentialindeterminingtheindi
viduals’welfare.Percapitaincomedoesnotgiveanyinformationonhowthegoodsandservicesareprodu
cedaredistributedinthecountry.
2.Itignoresthecompositionandqualityofgoodsandservices.Thepercapitaincomemaybehighyettheco
untryproducesmainlycapitalgoodsandweaponswhichdonotcontributetothepeople’swelfaredirectly.
Inthiscasethepercapitalincomewillbehighbutthestandardoflivingwillbelowandviceversa.
3.Inaccuratenationalincomeandpopulationfiguresarealwaysleadtofalseindex.PopulationfiguresinL
CDsarealwaysinaccuratebecauseofpoliticalfactorsandignoranceofthelocalpeopleaboutpopulationc
ensusaims.
4.Itignoresthecontributionofthesubsistencesector.Nationalincomefiguresexcludesubsistenceprodu
ctionyetthisisveryessentialcomponentofthegeneralwelfareofanindividual.Thusthepercapitaincome
couldbelowbutpeoplecouldstillenjoyasatisfactorylevelofwelfare.
5.Changesnthegeneralpricelevelovertimealsorenderspercapitaincomeaweakindexofstandardoflivi
ng.
6.Itignorestheeffectsofclimatefactors.Climateaffectsthegeneralwelfareofthepeopleyetpercapitainc
omedoesnottakethisintoconsideration.
7.Itignorestheeffectsofforeigninvestments.Theincomegeneratedmaybeofaforeigninvestorwhichdo
esnotimprovethematerialwellbeingofthelocalpeople.

38
8.Itdoesnotreflectthequalityoflifee.g.lifeinacrowdedcityisfulloftension:roadsareovercrowded,ther
eislossoftime,accidentsoccurdailywhichkillorcripplepeople’environmentbecomespolluted,therear
eproblemsofwater,power,housing,transportationetc.crimesspread,lifebecomescomplexandthequal
ityoflifedeteriorates.Consequentlysocialwelfarereduceswhichisnotreflectedinpercapitaincome.

Measures/Remediesusedtoovercomeincomeinequalities
Positiveremediesforincomeinequalities
1) Progressivetaxationpolicysothatthericharetaxedheavilytoreducetheirincomee.g.P.A.Y.E.
2) Increasedexpenditureonsocialservicesthatbenefitthepoor.
3) Ruraldevelopmentpoliciestoincreasetheearningpowersandopportunityoftheruralpoorandreduce
ruralurbanmigratione.g.thedecentralizationpolicytobringservicesnearertothepeople.
4) Minimumwagelegislationtoreduceontheearningdisparitiesoftheworkers.
5) Balancedregionalallocationofeconomicinfrastructuretobalancetheemploymentopportunitiesina
llregions.
6) Landreformmeasurestogivelandtothelandlessforagriculturalproduction.
7) Stronganti-trustandinheritancelawswithhightaxationtominimizegainsfromsuch.
8) Specialprogramsforthedisadvantagedgroupslikewomen,disablede.t.c.togivethemequalopportun
itiese.g.affirmativeactions.
9) Promotionofindigenoustechnologiestoprovideemploymentopportunitiese.g.intheinformalsecto
r.
10) Educationreformmeasurestoproducejobmakersandnotjobseekers.
11) Improvementingeneralinfrastructuree.g.roadconstructiontofacilitateincomegeneratingacti
vities.
12) Liberalizationoftheeconomytopromoteselfhelpprojects.
13) Agriculturalmodernizationtoboosttheincome.
14) Provisionofruralandgeneralcreditschemesforthelowincomeearners.
15) Subsidizationpolicyi.e.givingsubsidiestolowincomeearnersandtaxrelief.

TOPICSEVEN:MONEYMARKETS

39
 Money–
isanythingvaluablewhichisgenerallyacceptableforthedischargeorsettlementordebtorobligation.
Thisthereforemeansthat;whateverisusedasmoneyshouldbeimmediatelyandunquestionablyaccepta
bleinexchangeofgoodsandservices.
Moneyhasalegaltender.
CharacteristicsofMoney
i. Valuable:ithasastoreofvalueandmustbeacceptable.
ii. Portable:easytomovefromoneplacetoanother.
iii. Durable:itshouldbeusedforlong.
iv. Homogeneity:itshouldbelookingthesametoavoidconfusion.
v. Divisible:shouldbeabletobebrokenintosmallunits.
vi. Legaltender:itshouldbeacceptedbylaw.
vii. Limitedsupply:notallwouldgetaccesstoit.
viii. Stability:itshouldhaveastablevalueforalongtime,withveryminorvariation.
ix. Shouldbedifficulttochange:shouldbeeasilymade.

Moneymarkets
Isasubcategoryoffinancialmarkets.
Financialmarketsareinstitutionsandorganizationsthatreceiveandlendlargesumsofmoneyforashort
periodoftimei.e.theyarewherecreditorprimaryliabilitiesaretraded.
Mostmoneymarkettransactionsareconcernedwithsaleandpurchasesofnearmoneyassetssuchas-
billsofexchange
- shares
- Treasurybills
- Bonds
Nearmoneyassets
Thisisanythingthatfulfilsthestoreofvaluefunctionandisreadilyconvertibleintomediumofexchangeb
utitselfisnotamediumofexchangealsoknownasQuasiMoneyanditincludes:-BillsofExchange–
adocumentgivingunconditionalordertoanotherpersontopaytoanotherindividualsomeamountofmon
ey.
Treasurybills

40
Bonds
Companyshares:
Moneymarketsmakeshorttermloanswhichareselfliquidatingandaremostlyinvestedasworkingcapit
alintheproductionofconsumergoodsandtherateofinterestisusuallylow.
Thecapitalmarket
Theseareinstitutionswhichareconcernedwiththeprovisionoflongtermfinance/loans.
Thismayinclude-Bankloans
- Investmentinpermanentcapital
- Purchaseofshares.
Therateofinterestchargedisusuallyhigherinordertocompensatethelenderforthepossibleriskincapital
lossandinterestwhichisnormallyassociatedwithlongtermlending.

ImportanceofMoneyMarketsintheEconomy
a)Theyhelpincontrollingtheamountofmoneysupplyintheeconomy.
b)Itcontrolsthelevelofdemandformoneyintheeconomyi.e.thetotalmoneybalancesthateveryoneinthe
economywishestohold.
N/B:Bycontrollingsupplyanddemandformoney,moneymarketshelpcontroltheproblemofinflation.
c) Theyenhanceorincreasetheproductioncapacityintheeconomybyavailingmoneytoinvestorsthusin
creasingthelevelofoutputoftheeconomyorGrossDomesticProduct.
d) Theyenhanceextensiveinvestmentsintheeconomyespeciallytheprivatesectorthuscreatingemplo
ymentopportunities.
e) Theyhelpindiversificationoftheeconomyi.e.itenablescreationofawiderangeofeconomicactivitie
sinalmostallsectorsoftheeconomythusleadingtodiversificationoftheeconomy.

CentralBank
Isestablishedbythegovernmenttocontrolthebankingsystemandformulateandmanagethemonetarypo
liciesinordertocontroltheeconomy.

FunctionsofCentralBank

41
1. Itmaintainsthefinancial/
monetarycontroloverthecommercialbanksandotherfinancialinstitutionsi.e.itsupervisesandprovi
deslicensestothecommercialbanks.
2. Itissuescurrenciesonbehalfofthegovernmenti.e.itprintsandsupplythecurrencyintheeconomy.
3. Itregulatescredit(moneysupply)andtherateofinterestthroughitsmonetarytoolsandthereforemaint
ainspricestability.
4. Itactsasafinancialadvisortothegovernmenti.e.theCentralBankadvisesthegovernmentonitskeyfin
ancialoperations.
5. Itisabankertothegovernmenti.e.itkeepsandmaintainsallthefinancialaccountsofthegovernmentin
stitutionsanditsministries.
6. Itactsasalenderofthelastresorti.e.itlendsmoneytothecommercialbanksandgovernmentinstitution
swhentheyareintemporaryfinancialdifficulties.
7. Itisbankers’banki.e.everycommercialbankisboundbythelawtokeepcertainpercentageofitsdeposi
tswithCentralBank.Italsokeepsandmaintainstheforeignexchangereservesinthecountry.

MonetarytoolsusedbytheCentralBanktocontroltheeconomy
1. Legalreserverequirement
ItisafractionofthetotaldepositswhichcommercialbanksarerequiredtokeepintheCentralBank.During
inflationaryperiods,whentheCentralBankwantstorestrictcreditcreation,itraisesthelegalreserverequi
rements.Thisreducesthecapacityofthecommercialbankstolendmoneytothepublic.
Duringdepressionorrecessionaryperiod,whentheCentralBankwantstoexpandcreditandbooststheec
onomy;itlowersthelegalreserverequirementsoastoincreasethecapacityofcommercialbankstolendm
oneytothepublic.

2. Omo(openmarketoperations)
OpenmarketoperationsinvolvebuyingandsellingofsecuritiesbytheCentralBankthroughcommercial
banksfromortothepublicsoastostabilizetheeconomyduringperiodsofrecessionorinflationrespectivel
y.Duringinflationwhenthereisneedtoreducetheamountofmoneycirculatingintheeconomy,theCentra
lBankremovesmoneyintheeconomybysellingtothepublicthesecurities.Duringrecessionaryperiods

42
whenthereisscarcityofmoneyintheeconomytheCentralBankinjectsthemoneyintheeconomybybuyin
gsecuritiesfromtheeconomyorpublic.
3. Bankrates(interestrates)
Whentheeconomyisexperiencinginflation,CentralBankraisesthebankratestodiscouragethepublicfr
omborrowingandthusencouragingthemtosavewiththebankthishelpstocontrolinflationarypressure.
However,duringrecessionwhenthereisscarcityofmoneytheCentralBankhoweverlowerstheratestoen
couragemoreborrowingtofacilitateinvestmentsandcreateemploymentopportunities.
4. Selectivecreditcontrol
ItisatoolinwhichtheCentralBankinstructscommercialbankstofavour/
discriminateagainstcertainsectorsorborrowersinthecountry.Itisintendedtocontroltheflowofcreditin
differentactivitiesintheeconomyi.e.theCentralBankdirectsfromtimetotimethecommercialbankstogi
veornotgiveloans.
5. Liquidityratio
Itinvolvesthecontrolofmoneysupplyintheeconomybyconvertingthephysicalassetsintomoneyorcash
assets.
6. Specialdepositrequirement
AredepositswhichtheCentralBankdirectsthecommercialbankstokeepwiththeCentralBankoveranda
bovethelegalreserverequirements.Itisonlyusedduringsevereinflationintheeconomy.
7. Moralsuasion
ItistheissuingofpersuasiveinstructionsbytheCentralBanktocommercialbanksrequiringtheircoopera
tionintheimplementationofthemonetarypolicies.

Non-Bankingfinancialinstitutions
Arefinancialinstitutionsthatreceivedepositsfromthepublicandgiveloansbutdon’tcreatenewdeposits
ornewcredit.

Examples
Insurancecompanies
Developmentbanks
Savingandcreditschemes

43
Buildingsocieties
Housingfinance

RolesorFunctionsofnon-bankingfinancialinstitutions
1) Theyfacilitatethefinancingofmediumandlongtermprojectswhichordinarycommercialbanksdon’
tundertakeinpreferencetoshortprojects.
2) Theyofferuniqueservicese.g.theinsurancecompaniesofferuniqueserviceswhichcommercialbank
scan’tundertakee.gtheinsuringandindemnifyingagainstrisks.
3) Theypromoteinvestmentprojects;institutionslikedevelopmentbanksareveryusefulinfinancingin
dustries/projectsandundertakingfeasibilitystudyonprojects.
4) Facilitatetheraisingofcapitalforbusinessformationi.e.institutionslikestockexchangemarketsfacil
itatethetransferofsharesandsecuritieswhichpromotetheformationanddevelopmentoflargecompa
nieslargescalebusiness.
5) Theycaterforsmalltimesavers,suchinstitutionsassistpeoplewhohavelowincomestosavetheirmon
eyatevenveryshorttimedeviations.

TOPICEIGHT:PUBLICFINANCE
Isamacro-
economicdisciplinewhichdealswiththeprinciplesconcerningthecollectionofgovernmentrevenuean
dhowitisallocatedforpublicexpendituresinordertoachievecertainobjectivesandtargetsintheeconom
y.

44
Itismadeupofthefollowingbranches:-
1. Publicrevenue:itdealswiththemethodsofraisingpublicrevenuesthroughpublictaxation.
2. Publicexpenditure:itdealswithtotalamountofmoneythatgovernmentspendsonsocialservicesan
dtheeffectsofsuchexpenditure.Thegovernmentspendspublicrevenueonservicessuchas:-
Defense,Health,,Infrastructure,Educationetc.
3.Thepublicdebts:itdealswiththecausesandeffectsofdebtswhichthestate,localauthoritiesandpublic
cooperationsborrowforvariousreasons.Italsoexaminesthemethodsofpublicdebtmanagement.
4.FinancialAdministration:thisdealswithpreparationandsanctioningofthebudgetandauditingofall
governmentministries,governmentdepartmentsandallotherorgansofthestate.
5.Fiscalpolicy:itstudiestheuseofpublicfinanceoperationsespeciallytaxationthroughbudgettosupple
mentthemonetarypolicysoastobringabouteconomicstabilityandgrowthintheeconomy.

SourcesofGovernmentRevenue
1. Taxes:ArethemostvitalsourcesofGovernmentrevenue.Itisacompulsorycontributionbythepopula
tiontoanypublicauthority.
2. License:isthepaymentmadetothegovernmentbyanindividualinordertosecurepermissionorrightt
ooperatetrade/businessoranyothergainfulactivity.
3. Fines:arepenaltiesimposedoncitizenswhobreakthelawsofacountry.Theyformalsoasubstantialso
urceofgovernmentrevenue.
4. Fees:arepaymentsmadebyindividualsforpersonalservicesrenderedbythegovernmente.g.money
paidforsurveyingthelandofanindividual.
5. GiftsandGrants:arevoluntarycontributionsmadebyindividualsandsocietiestothegovernmentfo
rmeetingthecostofspecificprojects/schemesinpublicinterest.
6. Disinvestment/privatization:itinvolvesthesaleofstate-
ownedfirmsandassetstoprivateindividualandtheproceedsareusedtofinanceothergovernmentobli
gations.
7. Compulsorysavings:thegovernmentalsogetsrevenuefromsuchsavingslikeinsurancepayments,s
ocialsecurityfundse.t.c.
8. Treasurybills/
bonds:thegovernmentmayattimes“float”itstreasurybillstothepublicasameansofraisingrevenue.

45
9. Loans/
borrowings:thegovernmentcanattimesborrowinternally(frompublic)orexternally(foreigncount
ries)tofinanceitsbudgetdeficits.
10.Governmentinvestments:thegovernmentalsogetsitsrevenueinformofprofitsfromitscommercia
lproductiveactivitiesorthepublicco-operations.
11.Deficitfinancing:attimesthereisshortageofmoneysupplyintheeconomythenthegovernmentmay
printmoremoneytofinanceitsobligations.Thisisusuallyinflationaryinnature.
12.Rates:arepaymentsmadeonurbanprivatepropertiese.g.lands,housese.t.c.Theyareusuallycalculat
edonthebasisofthevalueofincomereceivedorpropertyvalue.

ReasonswhytheGovernmentimposetaxes
1.Raiserevenue-
Taxesarethemajorsourcesofthegovernmentrevenueandistheprimarypurposeofimposingtaxes.Ther
evenuecollectedisusedtofinancedevelopmenteconomicprojectsandpromoteeconomicgrowth.
2. Redistributeincome
Throughprogressivetaxesinequalitiesofincomecanbereducedbytaxingtherichheavilyandthepoorles
sorbygrantingsubsidiesfromtaxrevenuetoindustriesandprojectsthatbenefitthepoor.
3. Toprotecthomeindustries
Thehomeindustriesespeciallyinfantindustriescanbeprotectedbyimposingheavytaxesoncommoditie
scomingfromoutside;thusmakingtheimportsexpensiveandencouragetheconsumptionoflocallycom
modity.
4. Tocorrectthebalanceofpaymentdeficit.
Whentaxesareimposedonimports,taxescanbeusedtoreduceconsumptionandexpenditureonimportsb
ecausetheimportsbecomemoreexpensiveandthereforeitisanattempttocorrectBOPdeficit.
5. Todiscourageconsumptionofdangerousgoods
Taxescanbeimposedoncommoditieswhichareconsidereddangeroustohumanhealthsoastomakeitem
expensiveanddiscouragetheirconsumption.Consumptionofsuchproductsmayincludepolythene,alc
ohol,cigarettes,anddrugs.
6. Tocontrolinflation
Taxescanbeimposedsoastoreducethedisposableincomeandconsequentlytoreducedemandpressurei
ntheeconomy.

46
7. Todiscouragedumping
Thegovernmentmayimposetaxondumpedcommoditiessoastoraisetheirpricesandreducetheircompe
titiveadvantageoverthelocallyproducedcommodities.
8. Tocontrolmonopolies
Whenimposedalumpsumtaxcancontrolmonopoliesbyincreasingthecostofproductionandreducingth
eirprofitmarginsforcingthemtoincreasetheiroutputandopenup.
9. Topromotesavings-
Thegovernmentcantaxanddiscouragetheconsumptionofluxuriessoastoencouragepeopletosavef
oreconomicgrowthanddevelopment.
PrinciplesofTaxation(AdamSmith’sCannonofTaxation)
Inhisbookthe‘wealthofnations’AdamSmithgavefourrulesorcannonswhichshouldbefollowedwheni
mposingtaxthroughoutassessmentandcollection.
1. Equity/Equality
Ataxshouldimposeequalsacrificeonalltaxpayers.Theburdenofthetaxshouldbedistributedequallytop
eople’sabilitytopay.Therearetwotypesofequalitynamely:-
a) Horizontalequality–wheredifferenttaxpayersinsimilarsituation/positionaretreatedequally.
b) Verticalequality–
thisiswhentaxpayerwhoareinunequalsituationaretreateddifferente.g.thericharetaxedheavilyth
anthepoor.
2.Certaintyprinciple
Thenatureofthetaxpayeri.e.itsbase,theamounttobepaid,thetimeofpayment,themannerofpaymentsh
ouldallbecertainandknownandnotarbitrary.
3.Convenienceprinciple
Taxesshouldbecollectedduringperiodswhichareconvenienttothetaxpayerinrespecttotime,seasonan
davailabilityofincome.Itshouldbeimposedwhenthetaxpayerisinpositiontopay,themodeandplacesof
paymentshouldalsobeconvenient.
4.Economyprinciple(cheapness)
Thecostofcollectingthetaxshouldbesmallinrelationtothetaxrevenuei.e.thegeneralcostofcollectiona
ndadministrationoftaxshouldbelowerthanthetotalrevenuerealized.
Otherprinciplesinclude:
5. Productivity;taxshouldbeabletogenerateenoughrevenuetojustifyitsimposition.

47
6. Elasticity;thetaxcollectedshouldbeabletoincreaseordecreasewithariseorafallinataxpayer’staxa
bleincomeorpropertyrespectively.
7. Simplicity;thenatureofthetaxandthemodeofassessmentandcollectionshouldbestraightforward
andsimpletounderstandbyboththecollectorandthepayers.
8. Flexibility;thetaxshouldbeflexibledependingontheeconomiccircumstancesandaccordingtothe
requirementofthestate.
PublicExpenditure
Publicexpenditureistheamountofmoneythegovernmentspendsonsocialservicesandtheeffectsofsuch
expenditures.Typesofpublicexpenditure:
1. Re-currentExpenditure
Thisisthemoneythegovernmentspendsondailyconsumptionofgoodsandservicesinordertocarryouta
dministrativeactivitiesandtomaintainlawandorderthroughoutthecountry.
Theseareexpendituresthatarecontinuousandaremadeinordertofacilitatethedaytodayoperationsofthe
government.
2. Capitaldevelopmentexpenditure-
Thisinvolvesgovernmentexpenditureoninvestmentsinsectorssuchasagriculture,industries,mach
ineryandequipment,infrastructure,powere.t.c.
3. Transferpayment
Thisisthemoneyspentbythegovernmentonemergencieslikereliefandothertypesofdisasters.Italsoincl
udesgrants,pension,scholarship,bursary,resettlementpackages.

Fiscalpolicy
Fiscalpolicyisasetofeconomicmeasuresthatusethepublicfinanceoperationsespeciallytaxationandgo
vernmentspendingthroughthebudgettobringabouteconomicstabilityintheeconomy.

Aims/ImportanceofFiscalpolicy
1. Toreduceinflationarypressureintheeconomy
Thisisdonebyreducingmoneysupplyintheeconomybyincreasingtaxes,reducinggovernmentexpendi
turesandinternalborrowinginordertodeflatetheeconomy.
2. Toreduceunemploymentintheeconomy

48
Byincreasingexpenditureoninvestmentprojectsanddecreasingtaxesandincreasinginternalborrowin
g.
3. Toachievemoreacquitableincomedistributionintheeconomy
Thisisdonebylevyingprogressivetaxes,subsidizingandsettingupprojectsforthepoor.
4. Toimprovetheinfrastructuresoastoraisetheproductivityoftheeconomy.Thisinvolvessettingupr
oads,schools,etc.
5. Toattainabalancedeconomicgrowth:thiscanbeachievedthroughbalancingexpenditurebetween
sectorsandregions.
6. Toprotectthehomeindustriesagainstaggressivecompetitionfromwellestablisheddomesticfir
ms.
7. ToimproveBalanceofPayment:thiscanbeachievedbyraisingpricesofimportsthroughhighimpor
tdutiestherebyreducingtheimportbillstoovercomeBalanceofPayment.
8. Toprovidesocialservicesandraiselabourproductivity:thisisthroughbuildinghospitals,schools
e.t.c.andothersocialservices.
GovernmentBudget
Agovernmentbudgetisafiscalstatementoftherevenueandexpenditureestimateofgovernmentforapart
icularaccountingperiodusuallyoneyear.Itisusuallypreparedonannualbasisandpresentedtotheparlia
mentbytheministerforfinanceforapproval.Abudgetdealswithpolicytechniquesthatareaimedatdirect
ingthecourseofthenationforthecomingfiscalyearwhilealsogivingapreviewofthepreciousone.
TypesofBudget
TheGovernmentbudgetisbasicallyoftwocategoriesnamely:-
 Thebalancedbudget
 Theunbalancedbudget

BalancedBudget
Thisoccurswhentheprojectedfiscalrevenueequalstheproposedtotalexpenditureinafinancialyear;that
istheplannedrevenue=theplannedexpenditure.
UnbalancedBudget
Thisisatypeofbudgetinwhichtheplannedexpenditureandrevenuearenotequal,therearetwotypesnam
ely:thedeficitbudgetandthesurplusbudget.

49
Surplus–
itisoneinwhichtheprojectedrevenueisgreaterthanplannedexpenditureinagivenperiodusuallyayear.
Deficit–thisiswhereexpenditureisgreaterthanrevenuewithinafiscalyear.

Functionsofabudget
1. Itindicatestheestimateofrevenue.
2. Itindicatesestimateofrecurrentanddevelopmentexpenditureofgovernment.
3. Itoutlinestheeconomicandsocialpolicieswhoseimplementationrequiresgovernmentexpenditure.
4. TheGovernmentbudgetstabilizestheeconomythroughthefiscalpolicy.
5. Itregulatesgovernmentexpendituresandprograms.

PublicDebt
Thisincludesthenationaldebtplusthedebtincurredbythelocalgovernmentauthoritiesandpubliccoope
rations.NationalDebtisadebtownedbytheCentralgovernmenttothepeopleandinstitutionswithinitso
wnborders(internaldebts)andtoforeigncreditors(externaldebts).
Nationaldebtsthereforerefertodebtwhichthecentralgovernmentownsbothtoitsnationalsandoutsider
butdoesn’tincludethedebtincurredbythelocalauthorities.
Measurestoreducethedebtburdens(debtservicing)
1. Increasedexportsandexpansionofforeignmarketfortheexports.
2. Improvementofdomesticmarketsoastocreateaselfsustainingeconomy.
3. Reductionofdomesticconsumptiontoboostdomesticinvestment;thishelpstoproducemoregoodsfo
rexportstoincreaseforeignexchangeearning.
4. Reductionofimportsbyimposingstrictforeignexchangecondition.
5. Reductioninthevolumeofdebtprogramstoreduceborrowingfrominternationalfinancialmarket.
6. Adoptionofimportsubstitutionindustriestoreducetheneedtoimportexpensivecommoditiesandsav
eforeignexchange.
7. Reductionofunproductiveloanswhosepaymentimposeheavyburdenonthepopulationandarenosel
fliquidating.
8. RegulationofGovernmentexpendituretoreducegovernmentbudgetdeficitwhichareoftencausedb
orrowings.

50
9. Encourageborrowingfromlowinterestsourcestopayhighinterestloans.
10. ImprovingtermsoftradeofthecommoditiessoastoimproveBOPandminimizetheneedforborro
wing.
11. Debtcancellation;wherethecreditorsarepersuadedtocancelthedebt.
12. Debtreliefmeasureswheretheaffectedcountriesgetdebtrelieffromthecreditornation.

ChallengesofPublicDebt
1. Anexternaldebtsleadstotransferofresourcestoaforeigncountryandthisimposesaburdentothesocie
tyasawhole.
2. Itmaywidenincomedisparitywhentherepaymentoflocallyincurreddebtredistributesincomefromt
hepoortotherich.Thisisbecauseitistherichwhocanaffordtoleadthegovernmentyetitisthepoorwho
paytaxestoenablethegovernmenttorepaytherich.
3. Theavailabilityofloansencouragesthegovernmenttousetaxrevenueonunproductiveexpenditures.
4. Borrowingshiftstheburdenofrepaymenttothefuturegenerationswhotooknopartinthedecisiontoin
curtheloans.
5. Debtservicingleadstoforgoingcurrentconsumptionespeciallythesocialserviceandinfrastructure
whichisstalled.
6. Itencouragedebtdependsonothergovernmentsandinstitutionthatleads.
7. ExternaldebtsputpressureontheBOPpositionduetodebtservicing.
8. Debtservicinglimitscapitalaccumulationandinvestmentintheeconomy.
9. Itmayleadtoinflationsituationintheeconomy.

TOPICNINE:INFLATION
Asituationwherethereispersistentriseinthegeneralpricelevelofgoodsandservicesintheeconomy.
Typesandcausesofinflationinaneconomy
Generalcausesofinflation
a) Highcostofproduction/costpusheffects
Itmayarisefromthefollowing:-
 Highcostofrawmaterials
 Highwagesandsalaries
 Highcostoftransport

51
  Highfuelcost
 Highleveloftaxation
 Highinterestrate/costofborrowingmoney
 Highcostofadvertisement
b) Excessivedemandforgoodsandservices(demandpulleffects)
CIfthedemandisexcessivelyhighandsupplyislowitwouldforcethesupplierstoincreasethepriceofgoo
dsandservicesduetotheforcesofdemandandsupplyinthemarket.
c) Irrationalexpansionarymonetarypolicy
Itresultsintouncontrolledincreaseinthesupplyofmoneyleadingtoincreasedpurchasingpowersthateve
ntuallyleadstoincreaseinthelevelofaggregatedemandasopposedtothelevelofaggregatesupplythereb
yleadingtogeneralriseinsupplyofgoodsandservices.
d) Desireforhigherprofits
Thedesirebybusinessfirmstomakehigherorsupernormalprofitsmakesthemtoraisethepricesofgoodsa
ndservicesleadingtoinflation.
e) ExcessiveGovernmentexpenditureintheeconomy
Itleadstoexcessive/
increasedmoneysupplywithoutcorrespondingoutputofgoodsandservicesleadingtoinflationintheeco
nomy.
f) Politicalinstability
Itdisruptsproductionintheeconomycontributingtoshortageofgoodsandserviceswhichmayeventuall
yleadtoinflationastheproducertriestocoverupthelossesincurred.
g) Depreciationofthelocalcurrency
Whenthelocalcurrencylosesvalueagainstforeigncurrencythenthepricesofgoodsbegintoriseduetoinc
reaseinthepriceoflevelofimports.
h) Risingoffuelprices
Whenpricesofpetroleumproductsrisethenthegeneralpricelevelintheeconomyalsorisesbecauseitaffe
ctsalmosteverysectorintheeconomybutmoreparticularlytheindustrialandtransportationsectors.
i) Excessiveprintingofmoney
TheCentralbankmayalsoleadtoincreaseinmoneysupplywithoutcorrespondingincreaseinoutputofgo
odsandservices.Whenexcessmoneyisprintedthismayeventuallyleadtoinflation.

52
TypesofInflation
1. Demandpullinflation(demandsideinflation)
Thisisasituationwhereaggregatedemandexceedsaggregatesupplyatcurrentpricesandatfullemploym
entleveloftheeconomysothatpriceskeeponrising.Thistypeofinflationisusuallyassociatedwithfullem
ploymentsituationwhereanincreaseindemandleadstoupwardmovementinprices.Demandpullinflati
onissometimesdescribedas‘asituationwherethereistoomuchmoneychasingafewgoods.’

Inthediagramabove,theaggregatedemandcurve,AD0,andtheaggregatesupplycurve(AS0)givestheequili
briumprice(Po)andtheequilibriumquantity(Qo).
Supposetheaggregatedemandincreasesandtheaggregatesupplyremainsconstant,theaggregatedema
nddcurveADOshiftsupwardstoAD1.Assumingtheaggregatesupplysideremainsconstant,andthenthe
pricelevelwillchangefromPo–
P1 thustheeconomyexperiencesinflation.Thistypeofinflationcausedbyincreaseinaggregatedemandas
aggregatesupplyremainsthesameiscalleddemandpullinflation

2.Costpushinflation(supplysideinflation)
Thistypeofinflationoriginatesonthesupplysideandisasituationwhererisingpricesareinitiatedandsust
ainedbytherisingpricesoffactorsofproduction.
Itoccurswhencostsarepushedupwardsbytheincreasesinfactorpricesi.e.costofproduction.

53
Consideringthediagramabove,andtheAS1andAD1,theirpointofintersectionwillgiveustheequilibriu
mpricelevelp1andequilibriumquantityQ1.Duetoincreasedcostsofproductionthatforcestheproducersto
cutdowntheirlevelofproduction,theAScurveshiftstotheleftfromAS1toAS2increasingtheequilibriump
ricefromP1toP2andsincethisoccurs,theeconomyexperiencesinflation.
TypesofCostpushinflation
1. Wagepushinflation
Isaninflationthatoccurswhentradeunionsarestrongenoughtocauseanincreaseinthewagesespecially
wherethereisexcessdemandforlabourduetocompetitivenatureofthemarket.Theworkersmayalsodem
andforwagesincreaseduetoincreasedcotoflivingintheeconomy.Higherwageswouldmeanhighercost
ofproductionandiftheincreaseinwagerateexceedstheincreaseinproductivitythentheaggregatesupply
curveshiftstotheleftleadingtocommodityshortagethatwillforcepricesupwards.Besides,theproducer
swillincreasethepricesofproductsinordertocopeuptheincreasedcostofproduction.
2. Profitpushinflation
Thisisinflationwhichresultsfromincreasedpricesinordertoobtainexcessprofit;maybetheeffectofmo
nopolistoperationsinthemarket.Ifthereislargenumberofmonopolistsintheeconomy,thentherewillbe
agreaterpossibilityofprofitpushinflationsincepricedeterminationdependsonthemonopolist.

Measurestocorrectcostpushinflation
i. Provisionofsubsidiestoproducers
Thegovernmentcanhelptoreducethecostofproductionbygivingproducersassistanceinformofsubsi
dies.Thisreducesthepricesoffactorsofproductiontoaffordablelevel.
ii. Increasetheavailabilityofgoods
Thiscanbeachievedinthefollowingways:-
a) Throughincreasedlocalproductionofgoodsandservices.

54
 b) Throughimportationofgoodsandservicesthatarelacking.
iii. Pricepolicy:Thegovernmentinstitutespricecontrolbyfixingmaximumpricesforessentialgoodsso
astocontrolinflation.
iv. Incomepolicy:theGovernmentsetsamaximumwageratewhichisfollowedbywagefreezeinorderto
reducetherisingwagerateintheeconomythatmaycauseinflation.
Measurestocorrectdemandpullinflation
i. Restrictive/contractionarymonetarypolicy
Thispolicyreducesmoneysupplyintheeconomybysellinggovernmentsecurities,increasingthebankra
tes,increasingthelegalrequirementsintheeconomye.t.c.Itreducesthelevelofmoneycirculationintheec
onomywhichinturnaffectsthepurchasingpowerofconsumersandthusleadingtoreductionofaggregate
demandtowardsaggregatesupply.
ii. Restrictivefiscalpolicy-
Thisinvolvesthereductioningovernmentexpenditureandincreaseindomestictaxessoastoreduceth
edisposableincomesandpurchasingpowersofthepublic.

iii. Restrictiveincomepolicy
IswheretheGovernmentfixesmaximumwageratesinordertoreducethepurchasingpoweroftheconsum
ersandthegapbetweendemandandsupply.Thewagesarekeptconstantthroughwagefreezesothatthewo
rkersdemandstaysconstanttoavoiddemandexceedingsupply.
iv. Pricepolicy
Thegovernmentcontrolsthepricesofmajorcommodities.Thishelpstopreventpricesfromrisingcontin
uously.
v. Throughincreasedimportationofgoods
Thesupplycanbeincreasedbyimportingfromothercountries.Thispolicyincludesreducingrestrictions
/
barriersonimportssoastoincreasethesupplyandgoodsintheeconomyinordertoreducethepressureofag
gregatedemandondomesticgoods.
vi. Increaseintheflowofforeigninvestment

55
Sincethistypeofinflationoccursinaperiodoffullemploymentwhentherearenoadditionalresourcesfor
productionthegovernmentcanencourageforeigninvestorstobringinmoreresourcessoastoraiseoutput
.
Othertypesofinflation
1. Suppressedinflation:isasituationwheredemandexceedssupplybuttheeffectsareminimizedbythe
useofsuchdevicessuchaspricecontrolandrationing.
2. Bottleneck/
structuralinflation:itiscausedbyareductionintheoutput(supply)ofthemajorsectorsduetoinevita
bleand/orunforeseenfactors.
a) Structuralbreakdowninproductionprocess.
b) Fallinagriculturalproductionduetobadweather,pests,floodsetc.
c) Foreignexchangeconstraints.
d) Shortageoftechnicalandentrepreneurialskills.
e) Mismanagementoftheeconomy.
3. Importedinflation:itarisesfromimportinggoodsandservicesfromcountriesthatarealreadyexperi
encinginflation.Itthereforemeansthatacountryimportstheothercountry’sinflationinformofhigher
pricesofimportse.g.highpricesofpetroleumproducts(oil)mayleadtohighercostoftransportwhich
mayaffectallothersectorsoftheeconomyleadingtogeneralpriceincrease.
4. Inflationspiral:isasituationinwhichpersistentrisingpricesleadstoariseinthecostoflivinganddem
andofhigherwagesbyworkerstoraisetheirstandardsofliving.
Oncethewagesincreasethepricesofgoodsandservicesrisefurtherleadingtofurtherincreaseinthecostof
livingandmoredemandforupwardadjustmentandtheprocesscontinueswithoutend.

GeneralMeasurestocontrolinflation
1. Restrictivemonetarypolicies
2. ReducingGovernmentexpenditureinordertocontrolthepurchasingpower.
3. Increasingtheratesoftaxationinordertoreducethepurchasingpower.
4. Theconsolidationofallowanceandwagefreezingforthoseinhighincome.
5. Provisionofinvestmentincentivesinordertoencouragemoreinvestors.
6. Improvingtheinfrastructuretofacilitateresourcemovementandconsequentlyincreaseproduction.
7. Privatizationmoveordriveinordertoboostproductionintheeconomy.

56
8. Controlledprintingofmoney.
9. Provisionofsubsidiestoproducerstominimizethepricerise.

Effectsofinflationinaneconomy
1. Discouragesavings:itaffectstherateofsavingthroughconstantlossofmoneyvaluei.e.itrepresentsa
majordisincentivetosaveandthereforediscouragesinvestmentinitiativesaswell.
2. Balanceofpaymentproblem:therisingpricesathomewouldleadtoafallinexport,becausetheybeco
metooexpensivefortheforeignerstobuyyetimportsbecomecheaper.
3. Unfairincomedistribution:duringtimesofinflationsomegroupsbecomebetteroffwhileotherswo
rsenoff,thestrongergroupsgainwhiletheweakergrouplossesandthiscausesmiseryamongmajority
whocannotaffordhighpricesofgoodsandservices.
4. Unemployment:someworkersmaybeforcedtoquitwageemploymentespeciallyinurbanareasbec
ausetheycannotaffordhighcostofliving.
5. Fallsinrealincome:fixedincomeearnersofthesalariedworkerssufferfrominflationastheirrealinco
mefallswiththesizeofpricesofgoodsandservices.
6. Effectsoftheexchangerates:theforeigncurrency(dollar)willbuylessofourcurrency(kshs)becaus
ethepurchasingpoweroftheforeigncurrencyfallsasthedomesticpricesriseandthismayaffectthenat
ion.

57
TOPICTEN:INTERNATIONALTRADE
Itreferstotradebetweendifferentcountries.Itisafinancialtransactionthattakesplaceacrossnationalpoli
ticalfrontiers/
boundaries.Itiscomposedofimportandexporttradeandinvolvesmovementofgoodsandservicesandfin
ancesbetweennations.

BenefitsofInternationalTrade
1. Itpromotesgrowthofgrossdomesticproduct(GDP)therebyraisingthestandardofliving.
2. Helpsthecountrytoovercomeitsshortagesespeciallyduringtimesofdisaster.
3. Itexpandsmarketscopeofacountry’sproducts.
4. Itpromotesinternationalspecialization/divisionoflabour.
5. Itwidenstherangeofcommoditiesthatacountrycanenjoy.
6. Itfacilitatesoptimumresourceexploitationthroughincreaseddemandforoutput.
7. Helpsacountrytodisposeofitssurplusproducts.
8. Itencouragescompetitionleadingtobetterqualityservices/goodsandlowerprices/output/products.

58
9. Itbringsinrevenueinformofforeignexchangeearningtothecountryfromexportsandtaxesonimports
.
10. Itbringsbenefitofforwardandbackwardlinkagebetweenhomeandforeignindustries.
11. Itpromotespoliticalcooperation(peace,unity).

Theories/PrinciplesofInternationalTrade
Comparativeadvantagetheory
Thetheoryexplainsthebasisuponwhichcountriesspecializeintheproductionofcertaingoodsandservic
es.Itemphasizesthatcountriesshouldconcentrateontheproductionofgoodsandservicesinwhichtheyin
curtheleastdomesticopportunitycostinproductionandignoretherestsothatexchangemaybeenforcedl
eadingtointernationaltrade.
Absoluteadvantagetheory
Theabsolutecostdifferenceariseswhenacountryproducesacommodityatanabsolutelowercostofprod
uctionthantheother,thatis,whenacountrycanproducemoreofacommoditythantheotherusingthesame
quantityofgivenresources,itissaidtohaveanabsoluteadvantageinproductionofthatcommodityoverth
eothercountry.
TermsofTrade
Atermoftradeistherelationshipbetweenthepriceindexofexportsandpriceindexofimports.
Itisameasureoftherelativeforceofexportsandimports.
Itmayalsobereferredtoastheratioofpriceindexofexportstothepriceindexofimportsexpressedas:
TOT=PX=PriceindexofExports
PMPriceindexofImports
TOTistherefore,therateatwhichacountry’sexportexchangeagainstitsimporttorepresenttheunitofdo
mesticallyproducedgoodsthatareforgoneinordertoacquireoneunitofimportedgoods.
DescriptionofTOT
FavourableTOT
Thisiswhentheexportpricesarehigherthanthepricesofimportsi.e.X>M.
UnfavourableTOT
Itiswhentheimportpricesarehigherthanexportpricesi.e.M<X.
DeterioratingTOT
Thisiswhentheexportpricesarefallingandimportpaymentsarerising.

59
ImprovingTOT
Thisiswhentheimportpaymentisfallingandexportpricesarerising.

BalanceofPayment
BOPisarecord/
astatementofacountry’smonetarytransactionsitengagesinwhichtherestoftheworldinagivenperiodof
timeusually1year.
Itisthereforeabalancedsheetofacountry’seconomic/
monetarytransactionswiththerestoftheworldpluschangesinthecountry’sclaimsassets)andliabilitiest
otherestoftheworldforagivenperiod.

ComponentsofaBOPaccount
1. Currentaccount
Thissectionrecordsallthetransactioninvolvingphysicalmovementofgoodsandprovisionofservices.It
isfurthersubdividedintothefollowingsubsections.
i. Visibletradeaccount
Thesubsectionkeepsarecordofallthereceiptstheexportoftangiblegoodsandalltheexpenditureabroad
onimportofgoods.Thedifferentbetweenthesereceiptsfromabroadandtheexpenditureabroadisreferre
dtoasbalanceoftrade.
ii. Invisibletradeaccount
Thissubsectionrecordsalltransactionsarisingfromprovisionofservicessuchastourism,insurance,ban
king,transportatione.t.c.Itrecordsallexpenditureonservicesrenderedbynon-
nationaltotheeconomyandreceiptsfromofservicebynationalsabroad.
N/B:Thedifferentbetweenalltheexpenditureabroad(bothvisibleandnon-
visible)andallthereceiptfromabroadarisingfrombothvisibleandinvisibletradeaccountisknownasBO
Pcurrentaccount.
2. Capitalaccount

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Thissectionrecordsalltransactionsarisingfromcapitalmovementintoandoutofthecountry.Itrecordsca
pitalinflowsintothecountryandcapitaloutflowsfromthecountryinagivenperiodoftimeusuallyoneyea
r.
a) Capitalinflows
Theymayincludethingslike:-
a) Investmentbyforeignersinacountry
b) Purchaseoflocalcurrencybyforeignresidents.
Buyingtreasurybills,shares,realestates(physicalinvestmente.g.buildings,stocks,equipment).Thesec
onstitutecreditentryontheBalanceofPaymentaccount.
b) Capitaloutflows
Theseincludeinvestmentsbynationalsinothercountries,purchaseofshares,buyingtreasurybillsbynati
onalsinforeigncountries.TheseconstitutethedebitentryinBalanceofPayment.
3. Cash/Monetaryaccount
Thissectionrecordsallthetransactionsrelatedtochangesinthecountry;foreignexchangereservesandit’
sasummaryofthenetdifferencebetweentheinflowsandoutflowsfromcurrentandcapitalaccounts.Ani
ncreaseintheforeignexchangereservebetweenthetwoaccountsleadstoasurplusinthemonetaryaccoun
tandvice-versa.
4. Balancingaccount
ThissectionactsasthebalancingitemoftheBalanceofPaymentaccountofthecountry.Iftherecordsofthe
BalanceofPaymentaccountarecomplete,boththecreditanddebitsideoftheBalanceofPaymentstateme
ntmustbebalancedi.e.beequal;incaseofanydisagreement/
discrepancybetweentheidealtotalsandwhathasbeenrecordedonthecashaccountordifferencebetween
thecreditanddebittotalsontheBalanceofPaymentaccounte.g.ifthedebitsideis10andthecreditsideis15
thethenbalancingitemis5whichisthedifferencebetweenthetwosides.

RoleofInternationalfinancialinstitutionsinInternationalTrade
Therearetwo(2)maininternationalfinancialinstitutions.
 WorldBank
 InternationalMonetaryFund(IMF)alsoknownastheBritonWoodsInstitutionsof1944.

61
TheWorldBankformerlyknownastheInternationalBankforReconstructionandDevelopmentprovide
sloansforprojectstomembercountrieswhereastheIMFprovidesloansformembercountrieswithBalan
ceofPaymentdeficitproblem.

IMF(InternationalMonetaryFund)
Itrequirescountriestoownmembershipi.e.toregister.Thememberscontributetotheinstitutionaccordin
gtoeachcountry’seconomicposition.TheinstitutionassistsmembercountriesfacingaBalanceofPaym
entdeficitintheircountry.
TheRoleofIMFineconomicgrowthanddevelopment
1. ItfacilitatesexpansionandbalancedgrowthofInternationaltradebyprovidingfundstomembercount
rieswithBalanceofPaymentproblems.Thiscontributestopromotionandmaintenanceofhighlevelof
employmentandrealincomeleadingtoeconomicgrowthanddevelopment.
2. Itpromotesinternationalmonetaryco-
operationthroughprovisionofmachineryandcollaborationoninternationalmonetaryprogress.
3. Itpromotesforeignexchangestabilitybymaintainingorderlyexchangeratesamongmembercountri
esandthisavoidscompetitiveexchangeratecausingfluctuations.
4. Itavailstemporarilytomembercountriesthegeneralresourcesforproductionthusprovidingmember
swithopportunitytocorrectmal-
adjustmentintheirbalanceofpaymentwithoutresortingtomeasureswhicharedestructivetonational
andinternationalprosperity.
5. Itassistsintheestablishmentofmulti-
lateralsystemofpaymentinrespectofcurrenttransactionandeliminationofforeignexchangerestricti
onswhichhindergrowthofinternationaltrade.

WorldBank
RolesofWorldBankineconomicgrowthanddevelopment
1. Itassistsinreconstructionanddevelopmentofterritoriesofitsmembercountriesbyfacilitatingofcapi
talforproductivepurposes.
2. Itpromotesforeignprivateinvestmentsthroughparticipationinloansandotherinvestmentsorcapital
.

62
3. Whereprivatecapitalisnotavailableinreasonableterms,theWorldBankmakesloansforproductivep
urposesoutofitsownresources.
4. ItpromoteslongrangegrowthininternationaltradeandmaintenanceofequilibriumofBalanceofPay
mentofmembersbyencouraginginternationalinvestmentfordevelopmentofproductiveresources.

TheBalanceofPaymentEquilibriumandDisequilibrium
DisequilibriumintheBalanceofPaymentaccountarisesintheformofeitheradeficitorsurplusthatis,whe
nthecreditanddebitsidesofBalanceofPaymentaccountfailtoreconcile.Ontheotherhand,BalanceofPa
ymentequilibriumisasituationwhenthecreditanddebitsidesoftheBalanceofPaymentaccountsareequ
al.

CausesofBOPdisequilibrium(BOPproblem)
1. Effectofdomesticinflation:itmakestheexportofacountrymoreexpensivethantheexportoftheothe
rcountries.ThislimitstheexportrevenueandmayresultintoBOPdeficit.
2. Politicalstability:thisreducestheproductivecapacityofacountryleadingtolessforeignexchangeea
rningandincreasedmilitaryspending.
3. Effectofimportedinflation:thisresultsintohighpricesofimportswhichmeansincreasedimportex
penditurethatcreatesaBOPdeficit.
4. DeterioratingTOT:thecontinuousfallinthepriceofexportsandappreciationinthepricesofimports
impliesthattheimportexpenditureishighwhiletheexportrevenueislowcreatingadeficit.
5. Lackofcompetitivenessofproductsintheworldmarket:poorqualityproductswhichcannotcom
peteeffectivelyintheinternationalmarketaswellaslowproductivityresultsintolessexportrevenue.
6. Limitedcapitalinflow:duetostructuralrigiditiesintheeconomye.g.narrowmarkets,politicalinsta
bility,poorinfrastructure,complicatedadministrativeproceduree.t.c.mayfailtoattractforeigncapit
alinthecountrythroughforeigninvestment.
7. Excessivecapitaloutflow:thismayoccurduetohighrateofprofitrepatriationandcapitalflightbyfor
eignersduetoweakgovernmentpolicies.
8. Protectionalismontrade:becauseoftraderestrictionsthatdevelopedcountriesimposeonproductsf
romdevelopingcountries,themarketforandtheamountofproductsoldintheinternationalmarketisal
wayslimited.

63
9. Increasedneedsforcapitalgoods:theLCDshaveinelasticdemandsforcapitalgoodsassparepartse.
t.c.whichledtoincreasedforeignexchangeexpenditures.
10. Excessexpenditurebythegovernment:thehighexpenditurebythegovernmentbureaucratso
nforeigntravels,diplomaticmissionsabroad,andimportatione.t.c.leadstoadeficit.
11. Overrelianceonexpatriates’manpower:duetolowlevelofskillsdevelopmentespeciallyinL
DCstheyimportskilledlabourfromothercountriesathighcost.
12. Heavyexternaldebtservicing:thiscausesBOPdeficitduetomoremoneyspentinpayingbankl
oansplusinterestsaccumulated.

PossiblesolutionstoBOPdisequilibrium
MeasuresthatcorrecttheBOPproblemsaimedatreducingthedeficitbyreducingthedemandandincreasi
ngthesupplyofforeignexchange.Thesemeasuresmayincludethefollowing:
a) Importrestrictions:thiscanbedonethoughtariffs,quotaregulations,completebane.t.c.thisreduces
thebalanceofforeignexchangeintheeconomy.
b) Restrictivemonetarypolicies:theseareaimedatreducingtheamountofmoneyincirculationsoasto
reducethebalanceofforeignexchangeintheeconomy.
c) Restrictivefiscalpolicy:thisreducesthelevelofdisposableincomeanddiscouragestheexpenseonf
oreigngoods.Italsoincreasesrevenuesthroughtaxationwhilereducinggovernmentexpenditurether
ebyconservingexpenditure.
d) Importsubstitutionstrategy:thegovernmentcanencouragetheproductionathomeofformerlyimp
ortedgoodssoastoreducethevolumeofimportsandconserveforeignexchange.
e) Exportpromotionstrategy:throughthisthegovernmentcanencouragetheproductionforexchang
esoastoearnmoreforex.
f) Thecreationofpeaceful,stableandconduciveatmospherereducesmilitaryexpenditure.Italsofacilit
ates/enhancesinternationaltrade.
g) Throughmanpowerdevelopment:thetrainingoflocalskillsreducestheneedtoimportexpatriatest
herebyreducingexpenditureonexpatriatemanpower.
h) Throughdevaluationofcurrencies:devaluationaimsatmakingexportcheaperandimportexpensi
vesoastoencouragemoreexportationanddiscourageimportation.
i) Devaluationpolicies:itisalegalreductioninexchangerate(ofacountry’scurrencyinrelationtothera
teofthevalueoftheothercountry’scurrency).

64
j) Debtmanipulation:referstotheservicingthroughreschedulingorpostponingpayment,loancancell
ationanddebtconversione.t.c.

TradeRestriction(tradeprotectionalism)
Referstotherestrictionsimposedonfreedomoftradeamongtradingpartners/betweennations.
Therearevariousformsoftraderestrictions:-
1. Quotas
Thesearethequantativerestrictionontheamountofimportsandexportsinacountryinagivenperiodand
mayeitherbeimposedinphysicalquantitiesorintermsofthevalueofforeigncurrencythatcanbespent.

2. Tariffs
Thisisataxdutyimposedonimportsandexportsofacountry,tariffsareusedeithertoraiserevenueofthego
vernment/
toprotectthehomeindustries.Theeffectofatariff(importduty)istoraisethepricesofimportedgoodsinrel
ationtothedomesticallyproducedgoodssothatconsumersarediscouragedfrombuyingforeigngoods.
3. Foreignexchangecontrol
Thisinvolvesthegovernmentrestrictingtheamountofforeignexchangereservethatshouldbeavailedfor
theimportationofcertaincommodities.
4. TotalBan(embargo)
Acountrymayimposeatotalbanontheimportation/
exportationofcertaincommodities.Anembargomayalsobeendorsedontheimportationofproductsfro
mcertaincountry/tradelinkswithcertaincountry.
5. Specialdepositsonimports
Importscanbelimitedbyrequiringimporterstomakespecialadvancedepositsontheirimports.Thislimit
stheabilitytoimport.
6. Administrativeregulation
Thegovernmentmaystipulateacomplicatedandlengthybureaucraticsystemwhichmakesithardtocarr
youttrade.

Reasonsfortraderestrictions
1. Toprotecttheinfantindustries

65
Taxesmaybeimposedonimportedproductsinordertoenablethenewlyestablishedlocalfirmstogainco
mpetitiveadvantageoverforeignfirmsandsecuremarkets.
2. Topreventdumping
Itisjustifiedandnecessaryforacountrytoprotectitsindustries/
firmsfromunfaircompetitionfromforeignmarketsthatexporttheirproductsatlessthantheirdomesticpr
ices/productioncostsbutsimplyfordisposal.
3. Toreduceunemployment
Thegovernmentmayimposeabanonimportationandencouragedomesticproductionbyenhancingdeve
lopmentofindustriessoastocreateemploymentopportunitiesathome.
4. Toprotectdecliningindustries
Whenproductsofanindustrybecomeoutdatedandthedemandisdecliningthegovernmentcansavesuch
anindustrybyimposingrestrictiononimportationofsubstitutes.

5. ToimprovetheBOPposition
ThegovernmentcancorrectBOPdeficitthroughtraderestrictionsbyrestrictingtheamountofimportsint
othecountry.
6. Toimprovethetermsoftrade(TOT)
Acountrycanimproveitstermsoftradebyincreasingitspricesofexportsthroughrestrictionsonthesuppl
yofthecommoditiesontheexpenseofimporters.
7. Todiscourageconsumptionofdangerousgoods
Itissometimesundertakentopreventthenationalsfromconsumingcertaingoodse.g.bhange.t.c.whicha
reconsideredbeharmfulforhumanconsumption.
8. Revenueobjective
MostactivitiesespeciallytheLDCswouldimposerestrictionoftariffsinordertoraiserevenueforthegove
rnment.

66
TOPICELEVEN:DEVELOPMENTPLANNING
EconomicDevelopmentPlanning–
isadeliberategovernmentattempttoinfluence,directandinsomecasescontroleconomicchoicesandacti
vitiestowardsspecificobjectivesoveraperiodoftime.Itisthereforeadeliberategovernmenteffortaimed
atinfluencing,directing/
controllingeconomicdecisionsandlevelsofgrowthofanation’seconomicvariablessuchasincome,con
sumption,employment,savings,andinvestmente.t.c.toachieveaspecificobjectiveofnationaldevelop
mentwithinaspecificperiodoftime.

Levelsofdevelopmentplanning
Developmentplancanbecarriedoutatthreemajorlevels:
a) Microplanninglevel
b) Macroplanninglevel
c) Tertiaryplanning
Microplanning
Thisisplanningcarriedoutforthewholeeconomyoveragivendurationoftime.Itcoversallthesectorsand
regionsoftheeconomy.Therearethreesubsetsofmacroplanning:-
1. Annualplanning
Areplansfocusedforoneyearrelatingtotheeconomyasawhole.Theyaremoreflexibleandinmostcasesc
ontainedinthenationalbudgetofthecountry.
2. Fiveyearplan

67
ThisisthemostcommonplansespeciallyintheLDC.Theyareintendedforoveraperiodof4-
5yearsanddurationofregimeinpower.
3. Perspectiveplan
Thisrepresentstentativeoutline/
possibledevelopmentoveralongperiodoftimee.g.over15years,25yearsormore.Theyprovideusefulgu
idesandbackgroundstothemediumtermplans.
Microplanning
Itisthelevelofplanningwhichdoesnotcoverthewholeeconomybutmaycoverspecificsectors/regions.
Basicallyitisoftwotypes:-

1. Sectorialplanning
Thisisthedetailedplanningofaspecificsectoroftheeconomye.g.planningforagriculturalsectororindus
trialsector.
2. Theregionalplanning
Thistypeofplanningwhereattentionisfocusedonaparticularregion/usedwithineconomy.
3. Tertiaryplanning
Itisplanningatprojectedlevelthatinvolvesidentificationofpossibledevelopmentprojects,appraisaloft
hesesprojectsandtheirimplementation.
Typesofplans
Therearetwotypesofdevelopmentplans:
a) Partialplan
b) Comprehensiveplan

Partialplan
Itisonethatonlycoversasection/partofthenationaleconomysuchastheagriculturalorindustrialsectors.
Comprehensiveplan
Thisisonethatlooksattheeconomyasawholeboththeprivateandpublicsectorsoftheeconomy.
N/B:Itisusuallyfittedintotheframeworkoftheexpectedoveralldevelopmentoftheeconomy.

68
Problemsfacinginplanning,formulationandimplementation
1. Limitedinformation
Theavailabledataisalwaysunreliableandinadequatethusmakingtheimplementationoftheplansverydi
fficult.Itbecomesverydifficulttofocuswhatwillhappeninfuture.Iftheplancannottellwhatishappening
now.
2. Unexpectedeconomicdisturbance
MosteconomistsespeciallythoseofLDCsarevulnerabletoexternalfactorswhicharebeyondtheircontr
ole.g.fluctuationintheinternationaleconomicprices,domesticeconomicpolicieswhichdirectly/
indirectlyaffecttheeconomicplanse.g.fluctuationinoilprices.

3. Unstablepoliticaladministration
Lackofstablepoliticaladministrationsystemsleadtolackofsustainedcommitmenttoadevelopmentpla
n.
4. Overambitiousplans
Someplansaretooambitiousandtrytoaccomplishtoomanyobjectivesinaveryshorttimeandwithoutcon
sideringthecompetingandconflictingobjectives.
5. Institutionalweakness
MostLDCshaveweakadministrativeandtechnicalstafftodrawplansthusthereisinstitutionalweakness
andlackofcooperationresultingintoagapbetweentheplanningbodyandthedaytodaydecisionmaking
machineryofgovernment.
6. Limitedandunreliablesourcesoffunding
MostLDCsexperienceBOPdeficitandresourcesshortagesandthereforeheavilydependonforeignreso
urceswhichdon’tflowsteadily.
7. Lackofpublicsupport
Theplanslackthepublicgoodwillandsupportbecausethepublicisnotwellinformedandalsotheplansare
containedinmassivedocumentwhicharehardtofollow.
8.Plansrigidities;LDCsplansarerigidandaresometimesformulatedbyforeignerswhoneversuperviset
heimplementationthusmakingtheplanadjustmentdifficult.
8. Corruption
Corruptionsinthepartofplanformulatorsalsoaffectplanformulationandimplementation.
9. Externalpressure/influence

69
ThedonorstendtointerferewiththeplanningprocessofLDCsbydictatingtheprojectswhichshouldbecat
eredforbytheplanners.

StrategiesforIndustrialization
Thetermindustrializationreferstocreation/
expansionofindustrialcapacityinaneconomythroughdevelopmentofindustriesinaneconomy.
Therearetwomainstrategiesofachievingindustrializationinaneconomy,theyinclude:-
a) Importsubstitutionstrategy
b) Exportsubstitutionstrategy

Importsubstitutionstrategy(ISS)
Thisreferstotheestablishmentofindustriestoproduceforthedomesticmarketthemanufacturedgoodsw
hichwerepreviouslyimported.Itisthusanindustrializationstrategythatemphasizesontheproductionof
formerlyimportgoodsforthedomestic/localmarket.
Itisalsoreferredtoasinwardlookingdevelopmentstrategy.

Merits/Argumentsforimportsubstitutionstrategy
1. Itisaimedatconservingforeignexchange:whatwecouldhavespenttoimportissaved.
2. Employmentopportunities:itactsasasourceofemploymentopportunityforthelocals.
3. Itcreatesselfreliance:itactsasameansofreducingforeigndependenceasacountryproduceswhatitu
sedtoimport.
4. Developmentoflocalskills:itpromotesthetrainingofindustriallabourforcetoacquiretherequiredte
chnologicalknowhow(skills)therebyfacilitatingthedevelopmentofthelocalskills.
5. Useoflocalresources(rawmaterials):itfacilitatestheexploitationoflocalresourcesinordertoredu
ceexcesscapacityintheeconomy.
6. Expansionofmanufacturingsector:thesettingupofnumerousindustrieslocallypromotesdevelop
mentofmanufacturingsectorinagivencountry.
7. Controlofimportedinflation:ithelpsacountrytoavoidinflationarypressurecausedbyimportingpr
icerisinggoodsfromothercountries.

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8. Facilitatetechnologytransfer:theestablishmentofindustriesfacilitatestechnologicaltransferfro
mmostdevelopedcountriestoleastdevelopedcountries.
9. Itmayalsoactasasourceofforeignexchange:inthelongruntheindustriesmayserveasasourceoffor
exthroughexportationafterthedomesticmarkethasbeensatisfiedandtheindustrieshavegrownoutof
infantstage.
10. Developmentofinfrastructure:establishmentofindustriestoenhancedevelopmentofinfrastr
ucturalfacilitiese.g.roads,powersupply,wateranddrainagesystem,communicationnetworke.t.c.t
hatincreasesproductionandsupplyofgoods.
11. Increaseincome:industriesgenerateincometoindividualfirmsandgovernment.
12. SolvingofBOPproblem.
13. Facilitatescapitalinflow(foreigninvestment)
14. Promoteeconomicgrowth(increaseinGrossDomesticProduct)

Challenges/LimitationsofImportsubstitutionstrategy
1. Smalldomesticmarket
2. Poorqualitygoods
3. Highcostsofindustries;thefinalproductarealwaysmoreexpensivethantheimportedones.
4. Shortageofrawmaterials.
5. Highcostsofsubsidies(governmentprovidelowcostsubsidies)
6. Limitedcapital
7. Unreliablesourceoffunding
8. Limitedskills
9. Politicalinstability
10. Poorinfrastructure

Demerits/DisadvantagesofImportSubstitutionStrategy
1. Poorqualitygoods;itencouragestheproductionofinferiorgoods.
2. Resourcewastage;underutilizationduetolowmarkets.
3. Unemployment;useofcapitalintensivemethodinindustries.
4. Limitedvarietyofgoods;ISSlimitsthevarietyofgoodsavailableinaneconomythuslowstandardofl
iving.

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5. Monopolytendency;thisispromotedthroughtoomuchprotectionofferedtotheimportsubstitutioni
ndustriesinthelocalmarket.
6. Productionofconsumergoods;ISSisbasedontheproductionofconsumergoodsinsteadofcapitalg
oods.
7. Highdomesticprices;ISSindustriesleadtoestablishmentofhighcostofindustrieswhichproduceex
pensivegoodsthusthefinalproductsareveryexpensiveforthelocalconsumer.
Exportpromotionstrategy(EPS)
Thisisanindustrializationstrategythatemphasizesontheproductionofgoodsandservicesforexportorfo
rforeignmarket.
Itisadeliberatepolicytoexpandthevolumeofmanufacturedgoodsforexportsinordertoearnforex.

RequirementforExportpromotionstrategy
1. Availabilityofrawmaterials;thereshouldbesufficientquantitiesofrawmaterials.
2. Availabilityofskilledlabour;itshouldbeavailabletofacilitateproductionofgoodsofgoodsthatcan
competeintheinternationalmarket.
3. Poweradequacy;powershouldbesufficienttoenablenonstopproductions.
4. Developmentofinfrastructure;itrequiresgoodinfrastructuraldevelopmenttoguidemovementof
finishedgoodstothemarketwithease.
5. Marketresearch;thereshouldbeeffortstoestablishmanufacturingofthegoods.
6. Exportpromotioninstitution;theseshouldbeputinplacee.g.exportpromotioncouncilwhichwillp
romoteandfacilitateexportationofcommodities.
7. Tradepromotion;thestrategycallforadvertisementandpromotionalactivitiestoexposetheavailab
ilityofthegoods.
8. Provisionofincentives;governmentshouldprovidecreditandfiscalincentivesliketaxrelieforsubsi
diestoenabletheexporterscutdownoncostsoastomaketheirproductscompetitiveinthemarket.
9. Regionalintegration;theEPScallsfortradeagreementandeconomicco-
operationsoastoencouragetrade.

MeritsofExportPromotionStrategy
1. Employmentopportunities;jobopportunitiesareexpandedespeciallywhenlabourintensivemeth
odsareusedwhichincreaseproduction.

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2. Economicgrowth;facilitateseconomicgrowththroughincreasedoutput.
3. Diversificationofexports;itpromotesdiversificationofexportofgoodsandmarketinsteadofrelyin
gonagriculturalcommoditiesoroneproductonly.
4. ImproveBOPposition;throughenhancementofforexearning,BOPdeficitinLCDsaresolved.
5. Promotesmanufacturingsectors;settingupofindustriespromotetheexpansionofthemanufacturi
ngsector.
6. Promotionofinternationaltrade;itfostersinternationaltradebyreducinggeographicconcentratio
noftrade.
7. Improveinternationaltrade;itpromotesinternationalunderstandingamongtradepartners.
8. ImproveTOT;enablesacountry’sexporttosellathighervalue.
9. Highqualityoutput;productshadtobeofhighqualityaseventheagriculturalproductsaretobeadded
.
10. Developedinfrastructure;itencouragesthedevelopmentofinfrastructurelikeroads,airports,
storagefacilitiesforexportproduction.
ShortcomingsofExportpromotionstrategy
1. Massivecapitalrequirement;thestrategyisassociatedwiththeneedofhighcapitalinvestmentwhic
hisbeyondtheabilityofLDCs.
2. Highmarketingexpenditure;itrequiresheavyexpenditureonmarketresearchandextensiveadvert
isingintheforeignmarketyetLDClacksfundforsuch.
3. Poorqualityproducts;LDCproducespoorqualityproductswhichcannotcompeteintheworldmark
et.
4. Highlypricedgoods;LCDestablisheshighcostindustrieswhichproduceexpensiveproductsthatca
nnotcompete.
5. Depletionofresources;itleadstoquickdepletionofnaturalresourcesintheLDCs.
6. Wastageofresources;industriesmayrunatlossifforeignmarketarehardtobreakthroughandmayle
adtoresourcewastageifalloutputisnotbrought.

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TOPICTWELVE:EMERGINGTRENDSINDEVELOPMENTECONOMICS
I)InternationalTrade;aimedatimprovingeconomiesthroughexporttradeandimporttrade;furtheriti
mprovestheB.O.Pofcountries.
Emergingtrendsunderinternationaltradeinclude;

a)Globalization;carryingouttradeglobally/worldwide.
Aims;_buildeconomiesespeciallyoftheL.D.CsbytheDCs
_supplementshortagesintermsofgoodsandservices
_createpoliticalcooperationbetweencountries

b)Economicintergration:isthecomingtogetherofdifferentcountrieswithcommoninterestpurposefull
ytotradeinordertoimprovetheB.O.Psoftheirmemberse.g.ECOWAS,PTAetc.
Aims:_expandtrade
_Expandthemarkets
_Developinfrastructurese.g.roads,communicationnetworkse.t.c
c) Exportprocessingzones

II:Developmentofstrategicapproachestoeconomicgrowthanddevelopmente.g.
i)Millenniumdevelopmentgoalstoachieveuniversalgrowthanddevelopmentthroughtheirimplement
ationandaccomplishment
ii)Economicrecoverystrategiese.g.2002NARCgovernmentERSPi.e.itoutlinesthepathtoeconomicgr
owththroughspecificstrategies
iii)2030visionpaper;developedtohelpusachieveamiddle-basedeconomybytheyear2030
iv)KaziKwavijanaprogrammestocreateemploymentopportunitiesfortheyouths.
v)AGOAsummits&itsgoalstowardsachievingdevelopmentinAfricagenerallye.t.c.

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III:Developmentplanning-thegovernmentdrawsupdevelopmentplans(i.e.short-term,middle-
term&long-
termplansaimedatdirectingtheeconomytowardsachievingeconomicgrowthanddevelopmentthroug
htheirformulationandimplementation.
IV:Labourmovements/Tradeunions;establishmentofworkersunions/
organizationsaimedatimprovingtheworkingenvironment&welfareofworkersforthebettermentofthe
irstandardsofliving.
V:Industrializationstrategies;theseareaimedatachievingindustrializedeconomiesespeciallybythe
LDCse.g.EPs(Exportpromotionstrategies)&ISS(importsubstitutionstrategy)
VI:Populationcontrolmeasuresaimedatattainingoptimumpopulationforefficient&effectiveutilizati
onofresourcesinordertoobtainoptimumoutpute.g.theadoptionoffamilyplanningmeasurese.t.c
VII:Education/
trainingprogrammes;thesehavebeentailoredtowardsscience&technologybasedprogramstomatch
world-economicchangingtrends&requirementsinproduction.
VIII:Manpowerplanning;aimedatsolvingtheproblemsoflabourshortages&supplies.Thisisanimpo
rtantmeasuretowardssolvingunemployment&developmentofirrelevantskillsinthelabourforce
IX:Switchfromsubsistenceproductiontomarket-
orientedproductionaccompaniedwiththeadoptionofirrigatedagricultureratherthanrainedagriculture
.
X:Creditfacilitiesprograms;aimedatavailingfinancetopotentialinvestors&entrepreneurstoinvesti
neconomicactivities.InKenya,thegovernmenthascreatedvariousfinancialkittiese.g.youthenterprise
developmentfunds,womendevelopmentfundse.t.c

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