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Third Term Ss2 Economics
Third Term Ss2 Economics
Third Term Ss2 Economics
additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
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WEEKS TOPICS
1. Revision
2. Elementary Treatment of Utility Theory.
3. Market Structure
4. Market Structure (cont’d).
5. industrialization
6. industrialization (contd)
7. Mid-term Break
8. Agriculture
9. Elementary Treatment of Fiscal Policy
10. Elementary Treatment of Fiscal Policy (cont’d) and Balance and Unbalance Budget
11. Revision.
12. Examination.
WEEK 1: Revision
WEEK 2
ELEMENTARY TREATMENT OF UTILITY THEORY
70
Content 60
50
1. Concept of Utility Theory
40
2. The Law Diminishing Marginal Utility
30
3. Utility maximization and Derivation of Demand
Curve from the utility Theory 20
10
0
Sub-topic One: Concept of Utility Theory 0 2 4 6
Preview
Utility theory is based on the fact that satisfaction which consumers derived from consumption of goods
and services can be measure quantitative.
Meaning of Utility
Utility is the amount of satisfaction that a consumer derives from the consumption of goods and
services at a particular time.
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additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
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Since we have assumed that utility can be measured, we should be able to determine such facts: what is
the Total Utility a consumer derives from the consumption of a commodity; or what are the marginal
utilities derived from consuming several units of a commodity. As we said earlier, this is premised on
the assumption that consumption can be measured. Let’s examine these in detail
Total Utility:
This is the total amount of satisfaction a consumer derives from the consumption of several quantities
of a commodity. For, if a consumer consumes an egg per every two days, then the total of number of
eggs consumed in a month will be 15. This is expressed in the function below:
Average Utility
This refers to the total utility divided by the amount of the goods consumed. This can be expressed as
𝑇𝑈𝑥
𝑞𝑥
Marginal Utility
This refers to the change in total satisfaction derived as a result of a unit change in the consumption of a
commodity. This is expressed as follows
∆𝑇𝑈𝑥
MUx =
∆𝑄𝑥
Where MU stands for Marginal utility, ∆𝑇𝑈 stands for Change in total utility, ∆𝑄 stands for change in
quanity, and 𝑥 stands for that particular commodity.
70
60
50
40
Utility 30
20
10
0
0 1 2 3 4 5 6
Quanity Consumed
Total Utility
Marginal Utility
35
30
25
20
Utility
15
Marginal Utility
10
5
0
0 2 4 6
Quantity
In the above diagrams, it is clearly seen that as Ade consumed more bottles of Fanta, though his total
Utility increases, his Marginal Utility decreases up to zero point –the saturation point
Utility Maximization is based on the fact that humans’ beings are rational beings who would not want
to waste or misuse their resources. Or of what value is spending on what you get little or no satisfaction
from? Having established that marginal utility diminishes as more of a commodity is consumed, a
consumer will organize his consumption in such a way that he will reduce his expenditure on certain
commodities whose increased consumption yield low satisfaction and increase expenditure on others
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that will give him a higher level of satisfaction. This will do in such a way that the marginal utility
derives from commodity X will be equal to the Marginal Utility derived from commodity Y, and so on.
This is expressed in the equation below:
𝑀𝑈𝑥 𝑀𝑈𝑦 𝑀𝑈𝑧
𝑃𝑥
= 𝑃𝑦
= 𝑃𝑧
etc.
Therefore,
𝑀𝑈𝑥 𝑃𝑥
𝑀𝑈𝑦
= 𝑃𝑦
MUx, MUy and MUz represent the marginal utility of Comodities x, y and z
while Px, Py and Pz are their respective prices. The above formula for utility maximization works for
two or more goods.
For a single product, consumer maximizes his utility when 𝑀𝑈𝑥 = 𝑃𝑥.
For example,
Oranges Total Utility Mangoes Total Utility
1 100 1 50
2 190 2 95
3 270 3 135
4 340 4 170
5 400 5 200
6 450 6 225
7 490 7 245
8 520 8 260
1. The table above shows Mr. Y’s schedule of total utility for oranges and mangoes. The prices of
oranges and mangoes. The prices of oranges and mangoes are at $1.00 each. Mr. Y has $10.00 to spend
on the goods. Use the information contained in the table to answer the questions that follow:
a) Calculate the marginal utility for all the levels on consumption for the goods.
b) At equilibrium, how many (i) oranges (ii) mangoes, will the consumer buy?
c) (i) State the law of diminishing marginal utility (ii) State the marginal condition for utility
maximization.
Solution:
∆𝑇𝑢
Marginal Utility =
∆𝑞
(a)
Oranges Total Utility Marginal Utility Mangoes Total Utility Marginal Utility
1 100 100 − 0 1 50 50 − 0
= 100 = 50
1−0 1−0
2 190 190 − 100 2 95 95 − 50
= 90 = 45
2−1 2−1
3 270 270 − 190 3 135 135 − 95
= 80 = 40
3−2 3−2
4 340 340 − 270 4 170 170 − 135
= 70 = 35
4−3 4−3
5 400 400 − 340 5 200 200 − 170
= 60 = 30
5−4 5−4
6 450 450 − 400 6 225 225 − 200
= 50 = 25
6−5 6−5
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𝑀𝑈𝑂 𝑀𝑈𝑚
(b) Consumer reaches equilibrium at = when price for both mangoes and oranges is $1
𝑃𝑂 𝑃𝑚
50 50
1
= 1 at 1 mango and 6 oranges.
40 40
Or 1
= 1
at 3 mangoes and 7 oranges
30 30
Or 1 = 1 at 5 mangoes and 8 oranges
Mr. Y was given constraint of $10.00. This means that he cannot spend more than $10.00 and
he will not maximize his utility if he spends less than $10.00.
Mr. Y maximizes his utility where 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑂 × 𝑃𝑂 + 𝑀 × 𝑃𝑚
( 7 × 1 + 3 × 1) = 10
(6 × 1 + 1 × 1) = 7
(8 × 1 + 5 × 1) = 13
The combination of mangoes and oranges that gives Mr. Y $10.00 is 7 oranges and 3 mangoes.
Therefore, at equilibrium, Mr. Y will buy 7 oranges and 3 mangoes.
(c )i The law of diminishing marginal utility states that as a consumer consumes successive units of a
commodity, a point is eventually reached where consumption of an additional unit yields less
satisfaction.
(c) ii
𝑀𝑈𝑜 𝑀𝑈𝑚
𝑃𝑜
= 𝑃𝑚
Where MUo is marginal utility of oranges, Mum is marginal utility of mangoes, Po is the price of
oranges and Pm is the price of mangoes.
P D Fig. 2
𝑀𝑈 Fig. 1
MU
𝑀𝑈1 𝑃1
𝑀𝑈2 𝑃2
𝑀𝑈3 𝑃3
𝑀𝑈 D
𝑄1 𝑄2 𝑄3 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄1 𝑄2 𝑄3 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
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additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
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Evaluation
1. Households are assumed to maximize a. investments b. The utility c. profits
d. production
2. The theory of diminishing marginal utility states that as more units of a commodity are
consumed the A. satisfaction from an extra unit decreases B. satisfaction from
an extra unit raises C. satisfaction from an extra unit remains constant D. total
satisfaction from the goal remains the same.
3. Utility simply means A. usefulness B. power of satisfying a want C. want D.
import duty
4. As consumption of rice increases, its marginal utility to the consumer will A. increase
B. remain constant C. decrease D. fluctuate E. change proportionally
ESSAY
1. The table below shows the amount of utility derived by Mr. A by consuming water
Number of Total Average Marginal
Cups taken Utility Utility Utility
20
1 - -
-
2 22.5 -
75
3 - -
-
4 28 -
173
5 - -
227
6 - -
287
7 - -
-
8 44 -
422
9 - -
422
10 - -
From the table,
a. Calculate the missing total, average and marginal utilities
b. Can the nature of demand curve be derived from this table? Explain
References
1. Amplified and Simplified Economics for Senior Secondary school by Femi
Alonge, Longe Ventures
2. Fundamentals of Economics by R.A.I. Anyanwuocha, African Press Limited
WEEK 3
MARKET STRUCTURES
Content
Concept of Market
In everyday speech, market refers to a fixed place where people meet to buy and sell. But in relation to
Economics, market does not necessarily refer to a fixed place. It is defined as any arrangement, system
or organization whereby buyers and sellers of goods and services are brought into contact and can
transact business with one another. The means of contact could be through internet, phone, letter or
telegraphic system or a fixed place like the regular marketplace.
Types of Market
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Market could be classified based on the types of commodities bought and sold (i.e. consumer goods
market, labour market and capital and money market), or on the basis of channel of distribution (resale
and wholesale market), or the bases of prices.
Under this discussion, we shall look at the type of market on the basis of prices.
1. Perfect Competition/Market
A perfect market is a market structure in which prices are determined by the forces of demand
and supply. It is a market without government intervention. It should be noted that in the real
world a perfect market does not exist in its pure form.
2. Imperfect Competition/Market
An imperfect market is a market in which the forces of demand and supply are not allowed to
operate freely. There are different degrees of regulations of the market forces. In practical
terms, it is imperfect competition that operates in most markets
d. Monopsony
e. Oligopoly
f. Monopoly
a. Monopolistic Competition
This is a market situation in which there are many producers or sellers producing or
selling identical but non-homogenous commodity. Goods arenon-homogenous because
of the branding of the commodity. Examples include daily newspapers from different
publishing houses, producers of several bottled non-alcoholic drinks, etc.
b. Oligopoly
An Oligolistic market is one in which there are few producers or sellers but many
buyers. Large capital requirement may limit the buyers. Examples are network owners
like MTN, Glo Network, etc. Oligopoly is more competitive that monopoly but it is
less competitive than monopolistic competition
c. Duopoly
This is a market in which there are only two sellers or producers of a commodity but
there are many buyers.
d. Monopsony
A monopsony is market situation in which there is a single buyer but there are many
buyers.
e. Oligopsony
This is a market situation is which there are few buyers and many sellers of a
commodity.
f. Monopoly
Monopoly is a market situation in which a producer is the only seller of a particular
good that has no close substitute. By implication, a monopolist can charge whatever
price it wants and consumers are left with no choice than to purchase the product even
at high prices.
These are the costs that do not change with the level of production. They remain constant
whether the firm is working at full capacity or not. Examples are rent, purchase of equipment
and machinery, top management salary. These expenses are usually fixed in the short run.
Mathematically, TFC = TC - TVC
Or AC = AFC + AVC
Concept of Revenue
We shall consider three revenue concepts
1. Total Revenue
This is the total amount of income a firm or producer receives from the sale of its
product. Total revenue can be derived by multiplying output by unit price
2. Average Revenue
This is the total revenue divided by the number of units sold. It is the price per unit. It
is derived thus:
AR = 𝑇𝑅/𝑄 where TR is total revenue and Q is level of output.
3. Marginal Revenue
This is the increase in revenue resulting from one unit increase in sales.
WEEK 4
MARKET STRUCTURES (contd.)
Content
Price Determination
Under perfect competition, price is determined by the forces of demand and supply since no single firm
can dictate the price of its good. Firms in perfect competitive market are price takers. Therefore firm’s
individual demand curve has a horizontal Price line. The demand curve is perfectly elastic. This is
illustrated in the diagram below:
Quantity Determination
Under perfect competition, profit is maximized at the level of output where marginal cost equals
marginal revenue (𝑀𝐶 = 𝑀𝑅). However, it is possible for the firm to make abnormal profit in the short
run. Since the firm’s marginal and average costs fall with increasing output, he can sell at a price
higher than the marginal cost of production, thereby earning abnormal profit. This is shown in the
diagram below:
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In the diagram above, while the MC and AC are falling, the firm makes an abnormal profit of PMST.
OPMQ is the total revenue while OTSQ is the total cost of production, hence the profit PMST.
However, in the long run, the abnormal profits of perfect competition firms are wiped off. He is in
equilibrium and makes normal profit. Equilibrium is achieved when the firm produces the level of
output at which: MC = MR = AC = AR = MR = D = P. The slope of MC must be greater than the
slope of MR at equilibrium (i.e. MC must cut MR from below).
Unlike an individual firm under perfect competition, who faces a horizontal demand curve, a
monopolist faces a downward sloping average revenue or demand curve. This means that the
monopolist can sell more only by reducing his price. His demand curve is price inelastic.
therefore make abnormal profits both in the short run and in the long run. This is illustrated in the
diagram below:
In the diagram above, the monopolist maximizes his profit at point of output where his marginal cost is
equal to marginal revenue but not to the point where marginal cost is equal to price. Thus he makes
abnormal or supernormal profit by the excess of price (Pm) over marginal cost. In the diagram, above,
the monopolist makes a supernormal profit of shaded area.
PRICE DISCRIMINATION
Sometimes, a monopolist can charge two or more different prices for the same commodity. The process
of selling a particular commodity at different prices (in different markets) is called price discrimination.
Such price discrimination may be possible and profitable under certain conditions.
1. Market segmentation: If there are separate market or if he is able to create different markets, it will
be possible to sell at different prices in the different markets. The ability to create separate market is
called differentiation or segmentation. An example is the different markets existing in different
countries because of the use of tariffs.
2. Different price elasticities of demand in the different markets: If there are different elasticities’ of
demand, the seller will sell at a higher price in the market with an elastic demand. He may sell at a
lower price in the market with an inelastic demand. These lead to profit maximization.
3. Little cost of separating the markets: If the cost of separating the market is small, price
discrimination becomes possible. For example it cost N.E.P.A. little or nothing to charge industrial
4. Ignorance on the part of consumers: If the consumer is not aware of prices being paid by others (or
the ruling market price) it will be possible for the monopolist to charge him a different price, which in
most cases will be higher.
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5. High transportation costs: It becomes possible for the monopolist to charge difference prices if
transportation costs are high. The consumer may find it uneconomical to incur a high transport cost to
go to another place to purchase a commodity because of a little difference in price and so he may buy at
higher price even if he knows that the monopolist is selling the same commodity at a cheaper price
somewhere else.
CAUSES OF MONOPOLY
1. Act of parliament: This is a legal instrument by government conferring special monopoly of some
organizations to produce or supply certain goods or services e.g. public corporations
2. Patent law: This law confers on a firm special privilege to protect it new invention and it tends to
scare away other competitors
3. Level of technology: When a firm develops high level of technology, which makes goods cheaper,
this may force other competitors out of production.
4. Effective advertising: The success of a firm in effective advertising may force other competitors out
of business
5. Protection of public interest: Deliberate effort to protect public interest by government may confer
certain monopoly or some firms e.g. N.E.P.A.
6. Natural cause: Certain areas may enjoy the production or supply of certain goods due to natural
endowment e.g. crude oil in Niger Delta
7. Merging of producers: The merging of producers will make them stronger to be able to eliminate
other competitors in business.
Advantages of monopoly
1. Standardizations: - They produce quality and standardized product
2. Centralized management: - They have centralized body which determines the price or the output
since they cannot determine both price and output at the same time.
3. Economies of large scale production: - This serves as advantage to the firm and the public.
4. Greater efficiency: - They make research in order to produce at reduced cost so as to maximize their
profit.
5. It avoids wastage: - People carry out researches which may lead to the discovery of new product in
order to enjoy patent right
6. Better use of resources: -The type of wastages experienced in a competitive market is greatly
avoided.
7. Increase in supply: - Increase in production leads to increase in the quantity of goods supplied to the
market.
8. Greater opportunity to expand operations: - More profit made by the firm makes them to expand
their production.
9. It avoids wastage: - The type of wastage experienced under perfect competition is greatly avoided
under monopoly.
Disadvantages of monopoly
1. Danger of exploitation:- Monopoly can charge high price to exploit consumers since they have
control over the price of their commodity.
2. It leads to hoarding: - They may hoard their products in order to create artificial scarcity in a bid to
charge high price.
3. Decline in efficiency: - Since there is no competition, there may not be efficiency in their operation
4. Overproduction and waste: - They may waste resources especially if the firm is a public corporation.
5. Loss of freedom of choice: - Consumer cannot choose and they cannot control the quality of the
products. They are forced to consume whatever is produced by monopolist.
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Control of monopoly
1. Provision of substitute products
2. Privatization
5. Reduction of tariffs
WEEK 5
TOPIC: INDUSTRIALIZATION
CONTENT:
(a) Definition of industrial concepts. Plant, factory, firm, industry and industrial estate
(b) Location and localization of industry in Nigeria
Industry- Industry can be defined as commercial production and sale of goods or a specific branch
of production and trade. In these sense, industry refers to a collective term for a group of activities
directed to the production of a given class of commodities or a group of firms engaged in the same
area of production, example, all firms producing textiles belong to the textile industry.
Firm– This refers to a single unit or entity that carries out production of goods or services. It is a
single independently administered business unit of an industry.
Factory and Plant – Factory is an industrial building where laborers manufacture goods or
supervise machines processing one product into another. Typically, factories gather and concentrate
resources such as labour and capital, e.g. shoe factory, whereas plant is an asset of a business which
includes land, buildings, machinery and all equipment permanently employed. Example is electric
plant or power plant.
Industrial Estate – An industrial estate also known as industrial park is an area zoned and planned
for the purpose of industrial development.
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EVALUATION
Location of Industry
Location of firm means the siting of firm in a particular place. It is the aim of any investor to make
maximum profit. The location chosen by the entrepreneur will have an effect on the profit he will make.
The entrepreneur will therefore locate his firm in a place which he considers the most economical or
which minimizes his total, average and marginal cost of production.
Alfred Weber (1868-1958) pioneered the work on location of industry way back in 1910. His theory
was based on the principle that a business would seek to locate where costs could be minimized.
(1) Availability of land: - Land is very crucial to industry because industry cannot be built in the
air.
(2) Proximity of Raw materials: - An industry tends to be located near the source of raw-material if
the material is bulky and the finished product is light. E.g. cement factories are located at
Ewekoro, Yandev(Gboko), and Nkalagu (in Nigeria) because these places have large deposits
of limestone.
(3) Supply of labour: - Industries tend to be located in the cities and towns where there are surplus
of both skilled and semi-skilled labour.
(4) Availability of power supply: - Industries are usually attracted to the source of power, industries
are located near the coal mines.
(5) Nearness to large markets: - Bulky or heavy goods, such as furniture, blocks and bottled drinks
are expensive to transport and are, therefore produced near the market.
(6) Closeness to financial institutions: - This is for easy access for safekeeping their money and for
credit facility. This is not all that important.
(7) Transport cost: - Availability of transport facilities at reasonable expense is also essential since
transport costs come into total cost of production.
(8) Political factor: - Both local and foreign investors consider siting industries in places free from
political unrest.
(9) Government policy: - Governments often influence the location of industries either by direct
participation in the establishment of industries or by giving firms encouragement to set up in
particular areas.
(10) Climatic factor: - Climate determines the type of things to be produced in particular
areas so also the siting of industries.
(11) Natural factors: - The location of extractive industries depends on where raw-materials
could be found. Mining, for example, is possible only where minerals could be found.
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therefore to commercialize this document in any form without prior formal discussion with the management.
Localization of Industries
Localization of industries refers to the concentration of firms in a particular area or locality. The
essence of this is for firms to enjoy external economies of scale that have been created by pioneer
industries in the area of technology, transportation, communication, accommodation and other facilities.
i. Tax incentives to industries: - Government may give tax holidays to the growing firms in order
to compete favourably with the existing ones.
ii. Development of infrastructure: - Adequate infrastructure like good road, stable power supply,
pipe borne water, etc will attract both local and foreign investors.
iii. Protection of infant industries: - Infant industries are the newly established industries. They
should be protected like giving tax holidays, subsidies in order to compete with their
counterparts.
iv. The establishment of financial institutions to aid private enterprise.
v. Direct government participation: - Government can also be involved especially in import
substitution industries to discourage excessive importation.
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additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
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vi. Manpower training: - People should be trained in order to develop entrepreneurial skills that
will help them start their own business.
vii. Conscious development planning: -The planning should incorporate industrialization.
viii. The government could give assistance to private enterprises- provision of technical and
management advice, industrial research, and the provision of certain industrial inputs at
subsidized rates
ix. Direct government intervention by decree and legislations.
x. Removal of administrative bottlenecks which hinder industrial growth.
STRATEGIES OF INDUSTRIALISATION
(1) Sectorial consideration: - This advocates the development of all sectors of the economy and
areas of the country hand in hand. This strategy is aimed at discouraging lopsidedness in the
achievement of industrialization.
(2) Import substitution: - This is a means of replacing imported goods with domestic production.
Instead of importing certain goods, arrangements will be made to establish industries similar to
the ones abroad to produce such goods that were hitherto imported.
(3) Export promotion: - This strategy involves efforts of government geared towards the
promotion of industries that can produce goods that are exportable. This helps a country to
reduce its over-dependence on foreign made goods thereby saving foreign exchange that can be
used in industrial components.
(4) Size of firm: - Many people advocate small scale industrial development strategy while others
favour large-scale method. The proponents of small-scale method opine that since Nigeria and
other West African countries belong to the group of poor nations which lack adequate capital
and other resources, they should therefore start their process of industrialization from the
rudiment.
(5) Technique of production: - In Nigeria where we have abundance of labour, people advocate
for labour-intensive technique of production as against capital intensive methods of production
in order to reduce unemployment.
EVALUATION
WEEK 6
CONTENT:
INFANT INDUSTRIES
Infant industries are newly established industries that are at the developing stage and need protection so
that their products can effectively compete with products of long established international businesses.
(1) Infant industries need to be protected so that the economy can become self-reliant.
(4) It conserves scarce foreign exchange which can be used for industrialization.
(6) It develops the local market by increasing the production to meet up with ever-increasing demand.
(10) It increases the level of domestic income, this is because, and the country is no more depending on
the imported goods again.
(11) It reduces importation of goods, thereby improving the balance of payment position.
(13) If infant industries are protected, with time they will be a source of revenue to government through
tax payments.
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I bank loan
ii Issuing of shares.
v Trade credit
ix Sales of properties/assets
As a result of the shortcomings of the decree, it was revised in 1977- ‘’The Nigerian
Enterprises Promotion Decree’’. The decree this time classified enterprises into three
schedules.
Schedule 1: this schedule was increased by the inclusion of some businesses like clock and
jewelry manufacturing, etc. the decree reserved 100% equity participation for indigenes.
Schedule 2: under this schedule, the equity participation of indigenes was increased from 40%
to 60%.
Schedule 3: this schedule introduced the equity participation of indigenes which must not be
less than 40%
1. To ensure that the means of production and distribution are controlled by Nigerians and not
foreigners.
ADVANTAGES OF INDIGENISATION
4. It reduces foreign control of the economy: - It reduces the involvement of expatriate in Nigeria
economy.
5. Leads to local retention of profit: - Profit will be retained instead of being used to develop
foreign countries.
8. Development of private initiatives: - There is room for development of initiatives because it will
be highly rewarded.
10. Increase in standard of living: - Increase in production will increase output which will
eventually increase the living standard of people.
DISADVANTAGES OF INDIGENISATION
NATIONALISATION
Nationalization may be referred to as the taken over or transfer from private to state government
ownership of enterprises for economic, social and political reasons through the act of parliament.
Industries involved in nationalization are known as nationalized industries. Individual owners of
nationalized industries are paid compensation by the government, either in the form or cash or gilt-
edged.
ADVANTAGES OF NATIONALISATION
1. The government uses nationalization to control or even eliminate the exploitation of consumers
4. The nationalization of key industries enables the government to have a more effective control of the
economy.
DISADVANTAGES OF NATIONALISATION
EVALUATION
i. Explain what government has done to encourage industrialization in Nigeria. Back up your
answer with fifteen points.
ii. Explain five arguments for and five arguments against infant industries.
iii. Explain the objectives indigenization policy.
WEEK 8
SUBJECT: ECONOMICS
CLASS: SS II
TOPIC: AGRICULTURE
CONTENT:
(1) Land tenure system: - land tenure system in West Africa discourages farmers. It does not
encourage large scale farming since land is owned by the community, and as a result does not
make provision for willingness to embark on large scale farming.
(2) Poor marketing facilities: - there are no organized marketing channels for farm produce. There
is also lack of proper pricing for agricultural produce.
(3) Inadequate storage and processing facilities: - this forces farmers in Nigeria to embark on low
productivity and practice small scale farming since they do not have storage facilities where they
can store the excess products if they produce more crops.
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(4) Poor transportation system: - this prevents the farmers from carrying their crops to areas
where they can attract prices and are therefore forced to sell them within their locality where
they attract low prices because of bad roads.
(5) Natural disasters: - natural disasters like flood, drought, etc may occur and this will reduce
agricultural productivity.
(6) Use of crude implement: - subsistence farmers, as a result of illiteracy, shy away from using
modern methods. It may be lack of funds to buy some of the modern agricultural inputs. They
use hoes and cutlasses because agriculture has not been mechanized in Nigeria.
(7) Illiteracy of the farmers: - a lot of number of farmers is illiterates and as a result they cannot
make use of modern techniques in agriculture.
(8) Lack of technical knows how: - many farmers especially the illiterate ones lack requisite
technical knowledge and modern skills to raise the standard of farming and agricultural
production in their countries.
(9) Lack of social or basic amenities: - lack of social amenities like electricity, pipe-borne water
and proper health care makes able body’s men and women to migrate from rural to urban areas
in search of non-existent jobs.
(10) Problems of pests and diseases: - pests and diseases are not controlled by majority of the
farmers. Pests and diseases generally reduce the quantity, quality and income of the farmers.
(1) Provision of agricultural extension programmes in order to educate farmers in the modern
agriculture agricultural extension officers should be sent to various locations teaching them the
various modern techniques of improving them the various modern techniques of improving
agricultural yields.
(2) Provision of medical facilities: more hospitals should be built, doctors and nurses posted to
them and more drugs should be made available.
(3) Provision of credit facilities: many farmers cannot afford to buy the necessary agricultural
machines such as tractors, harvesters etc. To reduce this problem, government should help
farmers by providing this equipment for them at reduced cost so that they will be able to make
use of them.
EVALUATION
(1) There are many problems facing agriculture today – explain them.
(2) In what ways can the government improve agricultural production in Nigeria?
Sub-Topic 2:
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(1) Operation feed the nation (OFN): OFN was launched in 1976 by the Obasanjo Military
Administration. Its aim is to mobilize Nigerians to take active part in growing their own food
which will lead to increase in food production in the country.
(2) Provision of credit facility: the role of credit facility to agricultural development was
recognised to promote government to establish the Nigerian Agricultural Development Bank
with its headquarters in Kaduna. The bank gives loans directly to farmers, individual,
organisations and established institutions.
(3) The River Basin Development Authorities: the eleven RBDA was established in 1976 under
decree no 25 by Federal government. The aim of River Basin Development Authorities is to
develop land and water resources for the general development of agriculture in Nigeria.
(4) The land use Decree: This body was promulgated in 1978 and incorporated into the 1979
constitution. The decrease was aimed at reforming the land tenure system which had constituted
a bottleneck to large-scale farming in Nigeria.
(5) Green revolution: the second republic government of Shehu Shagari in an effort to curb
shortage of food in the country and increase food production launched green revolution in
1980. Their aim is to boost agricultural production.
EVALUATION
1. List the policies of agriculture in West Africa with special reference to Nigeria
2. Discuss how Operation Feed the Nation has helped the agricultural sector in Nigeria.
SUB-TOPIC 3
Marketing entails the performance of all business activities involved in the flow of farm produce from
the production point until they get to the final consumers. The marketing of agricultural commodities in
Nigeria is not organized. Some farmers sell their farm produce at the farm-gate while some take their
own to local markets nearest to them. We have two broad categories of markets in Nigeria (a) Domestic
markets and (b) export marketing through marketing boards
(1) Domestic Markets: sales of farm produce in this market could be in large or small quantities.
Farmers here usually have markets they visit either on daily, weekly, monthly or quarterly basis
to sell their farm produce.
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(2) Export marketing through marketing boards: as a result of poor storage processing and
packaging some farm produce got damaged. So marketing boards were established part of SAP
in Nigeria. Marketing boards are government agencies established to take care of the marketing
of agricultural commodities.
(1) They organize the marketing of all major agricultural products. They are to gather, grade and
maintain the high quality products.
(3) They generate revenue which brings great economic value to the government.
(2) The nation benefits from the provision of certain infrastructural facilities, as well as
scholarship schemes and enlightenment provided by the marketing boards.
EVALUATION
Sub-Topic 4:
There are future prospects for agriculture in West Africa, especially in Nigeria. This is because of
attention being given to agriculture presently by the various governments of West Africa. No
country in West Africa now wants to continue importing food which can be readily produced in the
country. Let us take Nigeria for instance, used to spend billions of dollars in the importation of rice
under embargo. i.e. there system has encouraged the back to land campaign raging on in the country
to the extent that even graduate of other disciplines apart from agricultural science are now in the
lead. It has even become one of the greatest employers of labour now.
EVALUATION
GENERAL EVALUATION
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OBJECTIVE TEST
(1) One of the reasons for the poor performance of the agricultural sector in Nigeria is the
(2) one of the effects of marketing of export crops by private merchants in Nigeria is
(3) the major factor that causes fluctuations in the supply of agricultural produce is
(a) high price (b) pests (c) weather variations (d) rural-urban migration (e) drought
(4) one of the factors responsible for the low productivity of agriculture in West Africa is
(c) industrialization
ESSAY TEST
(2) In what ways can the government improve agricultural production in Nigeria?
(4) Discuss how Operation Feed the Nation has helped the agricultural sector in Nigeria.
WEEKEND ASSIGNMENT
Read Economics for SSS 2 by M.A. Shittu O.S. Ajuwon, O. Kehinde (Page 83-84)
PRE-READING ASSIGNMENT
WEEKEND ACTIVITY
REFERENCE TEXTS
1. Economics for SSS 2 by M.A. Shittu, O.S. Ajuwon, O. Kehinde. MELROSE PUBLISHING
LIMITED.
WEEK 9
SUBJECT: ECONOMICS
CLASS: SS 2
2. Revenue Allocation
4. Direct Tax.
Public Finance
Public finance deals with the financial activities of government with respect to revenue and expenditure. It shows
government policy measures on generating revenue (income) and allocating expenditure, borrowing and lending,
receiving and spending by the federal, state and local governments and their agencies to achieve specific objectives.
1. Effective and efficient allocation of resources among the different sectors of the economy.
2. Improving the level of production by reducing tax, granting subsidies and increasing government investment in
productive activities.
3. Re-distribution of income and productive goods among the various classes in the economy.
4. Ensuring price stability by curtailing inflationary and deflationary tendencies in the economy to maintain
reasonable prices of goods and services over time.
5. Creating an improved and favorable balance of payments through increased taxation, import duties, subsidies, etc
6. Creation of employment opportunities thereby reducing the level of unemployment to the barest minimum.
7. Development of a good and appropriate fiscal policy for the government.
8. Promotion of social welfare through the provision of infrastructural goods at reduced prices.
9. Revenue generation through creation of diverse avenues by which government can derive more revenue.
Fiscal Policy
Fiscal policy involves the use of income and expenditure instruments to regulate economic activities. It is the
use of government revenue through taxation and other sources with a definite pattern of expenditure to
influence the economy.
EVALUATION
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Revenue allocation is the process of sharing the nation’s annually generated revenue among the various levels
of government i.e. Federal, State and Local governments.
In Nigeria, various commissions were set up over the years to resolve the problems arising from revenue
allocation. These include:
In all, each of these commissions came up with a formula thought to be workable in allocating the
centrally-collected revenue among the different levels of government. These formulae were based on
some principles.
The principles used by one or the other of the revenue allocation commissions include the following:
1. Derivation: that states from which a source of revenue is obtained should receive an extra share over
and above others.
2. Even Development: spreading growth and development in a way to reduce inequality among states
and local governments.
3. Population: consideration to be given to population strengths of states.
4. Land Mass: that states with large expanses of land would require more revenue to develop the land
resource.
5. Equality of States: this principle views states as being equally created. Therefore, they should be
equally empowered.
6. Need: that needs of individual states should be given consideration in sharing national revenue.
7. Absorptive or utilization capacity: that revenue should be allocated on the basis of how each state is
able to efficiently utilize them.
8. National interest: this is used by the highest level of government on discretion to allocate funds to
lower levels or units to serve diverse needs and considerations.
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One or more of these principles have been used by the various commissions over the years to come up with
different formulae as in the table below:
Government Revenue
Government (Public) revenue is the total income accruing to the government at all levels (federal, state, local)
from various sources to run the country.
Capital Revenue: This is revenue from irregular sources for meeting expenditure on heavy capital projects
e.g. Grants, loans tied to a project, transfers from current revenue, etc.
Recurrent Revenue: This is revenue from regular sources e. g. taxation, fees, licenses, fines, interests on
loans, etc.
Government Expenditure
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Government expenditure refers to the total expenses incurred by public authorities at all levels of
administration (federal, state, local) in the country. This includes both recurrent and capital expenses.
Capital Expenditure
Capital expenditure are expenses on long-term capital projects e.g. roads, bridges, schools, hospitals,
industries, sinking of bore holes, building of offices, etc.
Recurrent Expenditure
These are expenses on the day-to-day running of activities of government which are not permanent in nature.
These include expenses on salaries, bills, stationeries, maintenance and repair of infrastructures, etc.
There are different areas and sectors which government expends on. These include the following:
EVALUATION
1. Differentiate between - capital revenue and recurrent revenue; capital expenditure and recurrent
expenditure.
2. List and explain five sources of government revenue.
3. Enumerate with examples five items of government expenditure.
ESSAY TEST
1. Explain government expenditure.
2. Mention and explain three items of government expenditure.
3. List 5 sources of government revenue.
4. Differentiate between government revenue and government expenditure.
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CONTENT:
(1) Tax is a compulsory levy imposed by the government, paid on income and gains occurring to
individuals and organization as well as production and consumption of goods and services, and
disposal of properties for the common good of all
(2) It is the compulsory payment made by individuals and organizations to the government in order
to meet her expenditure.
1. Revenue Generation: The main purpose of imposing taxes is to generate revenue for financing
government activities.
2. Discourage consumption of certain goods: certain goods like tobacco, alcohol are considered
harmful to the health of the people, hence government impose heavy tax on them.
3. Control and stabilize the economy: taxes are imposed to control and stabilize the economy
especially during inflation and recession. During inflation, taxes are raised to reduce the
disposable income and reduce taxes to increase disposable income during economy down-turn.
4. Redistribute income: government can through progressive tax reduce income
5. Promotion of economic growth: if government wants to increase output, it reduces tax paid by
companies or give tax holiday to infant industries. It will increase employment generation and
expansion of the economy.
6. Control of balance of payment problem: if important bill is higher than export, balance of
payment deficit will arise. Tax on imports will reduce imports and encouragement of export
will bail the country out of its financial difficulties.
7. Prevention of dumping: Tax increase on imports will prevent dumping of cheap and undesirable
goods into the local market.
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8. Protection of infant industries: Newly established industries are protected from stiff
competition from imported goods. Taxes on imported goods are increased, while home
industries are granted tax exemption or tax holiday. Home industries can survive.
9. Improvement in employment generation: -Government can introduce tax cut to stimulate
demand and increase output. This promotes employment for the teeming jobless youths.
SYSTEMS OF TAX
There are three systems of tax. They are: (i) progressive (ii) proportional tax (iii) regressive tax
1. PROGRESSIVE TAX
A tax is progressive if the rate increases as income increases. An individual with high income pays
more than a low income earner. Percentage or rate of tax increase as income increases. Example
personal income tax was known as Pay As You Earn (PAYE). It can be explained diagrammatically as
below:
0 Income
There is direct (positive) relationship between income and tax rate. The higher the income, the higher
the tax paid.
Example: A man earns N5,000 and pays 3% which is N 50. The other earns N50,000 and he pays 10%
which is N5,000.
(i) Tax evasion: Potential tax payers like politicians and business tycoons are notable tax
evaders.
(ii) Injustice: high income earners study and work very hard and deserve to enjoy their sweat
instead of punishing them with high taxes.
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(iii) Discourage capital formation: progressive tax discourages savings and investment.
(iv) It is arbitrary: there is no standard or yardstick for fixing rate of tax. For example, the then
government of Osun state in 1999 to 2000 deducted about 10% from the salary of all
workers.
2 PROPORTIONAL TAX
This is a system of tax in which the same rate is charged every tax payer irrespective of the level of
income. If the tax rate is 5%, a person earning N2,000 pays N100, N10,000 pays N500 and 50,000 pays
N2,500. It can be explained graphically as below:
Tax rate
Proportional tax
0 Income
3. REGRESSIVE TAX
This is a system in which tax rate decreases as income increases. Higher income earners pay less tax
than low income earners. Example, sales tax Again, Mr. A. Earns N1,000 and Mr. B earns N4,000
monthly. If Mr. A pays N100 and Mr. B pays N200. Mr. A pays more tax than B because he pays 10%
while Mr. B. Though N200, percentage is 5. It can be illustrated below:
Tax rate
Regressive Tax
0
Income
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TYPES/CLASSIFICATION OF TAX
Tax is classified into two. They are 1 direct and 2. Indirect tax
1. DIRECT TAX
This is a tax levied directly on income of individuals and profits of companies by the government.
The burden of tax is borne totally by the tax payer. Examples: personal income tax, capital gain tax,
company tax , education tax, poll tax.
(i) It may discourage production of goods on which taxes are levied. Such taxes will increase
their cost of production.
(ii) It reduces the savings ability of tax payers
(iii) It discourages investment as it reduces the amount that companies can plough back into the
business.
(iv) It reduces workers disposable income. Hence their purchasing power.
(v) It is not universal as it is imposed on only some selected sources of income.
(vi) It may lead to tax evasion whereby tax payers fill wrong tax returns to reduce the amount
they will pay.
INDIRECT TAX
Indirect taxes are taxes levied on production and consumption of goods and services. Examples are
custom duties; value added tax, sales tax, etc.
1. Custom duties: these are in two forms – (a) import duties – taxes imposed on imported goods
(b) export duties – taxes levied on a nation’s export goods
2. Value Added Tax (VAT): Taxes levied on goods and services at each stage of production.
3. Exercise duties – taxes imposed on goods manufactured in a country e.g. beer and cigarette. It
is also used to check the consumption of some goods.
4. Purchase tax – imposed on specified goods and paid by wholesalers. It is a percentage of the
wholesale price.
1. Indirect taxes are regressive in nature as both high and low income earners pay the same
amount on goods purchased.
2. They are inflationary in nature as high taxes may increase production costs which will result in
high commodity prices. z
3. Uncertainty and inaccuracy – the amount to be generated from indirect taxes cannot be easily
ascertained.
4. It discourages investment: high custom duties on raw materials and finished goods discourage
intending investors and reduces the level of production.
5. It is difficult to determine the actual tax burden the percentage of tax burden borne by
producers, wholesalers/retailers consumers.
6. Indirect taxes are difficult to evaluate and remit to appropriate authority by collecting agencies
– producers and sellers.
The tables below show the expected revenues and projected expenditures from the budget of a
hypothetical country in 2016. Use the information in the tables to answer the questions that follow:
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EXPECTED REVENUE
ITEM
AMOUNT (millions)
General administration 220.10
Maintenance of foreign missions 50.00
Transfer payments 65.00
Building of schools and hospitals 200.00
Road construction 180.90
A Calculate the total revenue from: (i) Direct tax (ii) Indirect tax (iii) Non-tax sources
B. Determine the total (i) Capital expenditure (ii) Recurrent expenditure
C. Determine whether the budget is a surplus or deficit.
Solution:
A(i) Direct tax : Company income tax = 150.00
Personal income tax = 80.00
TOTAL = 230.00
(ii)Indirect tax: Customs and excise duties = 300.20
Value added tax = 100.00
TOTAL 400.20
(iii) The revenue from non-tax sources: Rent, royalties and profits = 75.00
Fees and specific charges = 60.80
TOTAL 135.80
B (i) Capital expenditure: Building of schools and hospitals = 200.00
Road construction = 180.90
TOTAL = 380.90
(ii) Recurrent expenditure: General administration = 220.10
Maintenance foreign mission = 50.00
Transfer payment = 65.00
TOTAL 335.10
EVALUATION
1. Give 5 examples in tabular form of direct tax and indirect tax.
2. Mention and briefly explain the 3 systems of tax show them graphically.
3. What is incidence of taxation?
WEEKEND ASSIGNMENT
Objective:
6. The system of taxation where payers pay the same percentage of their income as tax is called (a)
proportional tax (b) direct tax (c) regressive tax (d) indirect (e) progressive
7. Revenue can be generated by the government through all these means except (a) direct tax (b)
indirect tax (c) annual budget (d) PAYE (e) custom duties
8. A tax which is based on the value of a commodity is called (a) purchase tax (b) progressive tax (c)
regressive tax (d) ad valorem tax (e) poll tax
9. If Mr. Olu earns N5,000 and pays N500 as tax; Mr. Ade earns N 20,000 and pays N1,000 as tax; the
tax system in use is (a) Competitive tax (b) comprehensive tax (c) proportional tax (d) regressive tax (e)
poll tax
THEORY QUESTIONS
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PRE-READING ASSIGNMENT
REFERENCE TEXTS
WEEK 10
SUBJECT: Economics
CLASS: SSS II
CONTENT:
i. Incidence of Taxation
v. Ways of financing deficit budget and their effects (e.g. debt burned, debt relief, debt buy
back)
INCIDENCE OF TAXATION
Incidence of taxation refers to who bear the burden of tax i.e. who finally pays an imposed tax. For
direct tax, the burden is borne by the income earner or the tax payer. But for indirect tax, it may be
difficult to determine who actually bears the burden of taxation. This depends on the elasticity of
demand for the commodity which is taxed. The burden of taxation may be borne by the producer/seller
or the consumer or shaved between them.
(i) Incidence of indirect tax when demand is perfectly inelastic: The entire burden of tax is shifted
on consumers via higher prices since demand will not be affected i.e. quantity demanded
remains the same. This illustrated thus:
𝑆1
Price D
𝑆0
𝑃1 M
𝑆1
𝑃0 N
𝑆0
D
0 Q Quantity
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In the figure above, the tax is represented by MN. This tax increases the producer’s cost of production.
Since the same quantity is bought irrespective of the price, producer increases the price of the
commodity from 0𝑃𝑂 to 0𝑝1. The consumer bears the full tax burden represented by𝑃0 𝑁𝑀𝑃1
(ii) When demand is perfectly elastic, the producer or seller bears the whole burden of taxation. This
is because any increase in price may make demand fall to zero.
Price 𝑺𝟐
𝑺𝟏
P D
M
𝑺𝟐
R
N
𝑺𝟏
0 𝑄2 𝑄1 Quantity
From the figure above, the tax is represented by MN. Since the tax increases the cost of production, it
reduces the supply from 0𝑄1 to0𝑄2 . However, the price remains at OP since any attempt to increase
price will make demand to drop to zero. The producer therefore bears the entire burden of tax
represented by RNMP.
(iii) When demand is fairly elastic, the burden of taxation will be shared between the producer/seller
and the consumer. The incidence/burden is borne more by the seller and less by the buyer/consumer.
𝑺𝟏
Price
D 𝑺𝟎
M
𝑃1 Borne by consumer
𝑃0
R
𝑺𝟏 D
Borne by producer
K N
𝑺𝟎
0 𝑄1 𝑄2 Quantity
From the figure above, the tax is represented by MN. Since the entire tax burden cannot be shifted to
the consumer, this increases the cost of production which reduces the supply from 𝑄2 to 𝑄1 . Producer
bears the tax burden represented by 𝑃0 RNK (shaded) while the tax burden represented by 𝑃1 MR𝑃0
(unshaded portion) is borne by consumer. The greater burden is borne by the producer.
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prior formal engagement with school management. This material was developed for the use of teachers and students of
the Goodwill Group of Schools. All financial commitment has been duly fulfilled by the school management. It is prohibited
therefore to commercialize this document in any form without prior formal discussion with the management.
(iv) When demand is fairly inelastic, the tax burden falls more on the buyers and less on the
seller.
𝑺𝟏
Price D
𝑺𝟎
𝑷𝟏 M
Borne by the consumer
𝑷𝟎 K
𝑺𝟏 Borne by the producer/seller
M N
𝑺𝟎 D
0 𝑄1 𝑄0 Quantity
In the figure above, consumer bears the tax burden represented by 𝑃1 MK𝑃0 (unshaded portion) while
the producer or seller bears the tax burden represented by 𝑃0 KNM (shaded portion). The consumer
therefore bears greater burden of tax.
(v) Unitary demand – Here, tax burden is shared equally between the seller and buyer
Price D
𝑺𝟏
𝑃1 M 𝑺𝟎
Borne by the consumer
𝑃0 K
Borne by the producer/seller
𝑺𝟏
R N
D
𝑺𝟎
0
𝑄1 𝑄0 Quantity
From the table above, the producer passed half of the tax to the consumer in the form of higher prices.
The tax is represented by MN, and the price increases from 0𝑃0 to 0𝑃1 . The tax burden borne by the
consumer is represented by 𝑃1 MK𝑃0 (unshaded portion) while the tax burden borne by the producer or
seller is represented by 𝑃0 KNR (shaded). The two rectangles are equal.
This material is NOT the property of Goodwill Group of Schools but has been adopted by the school management as
additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
prior formal engagement with school management. This material was developed for the use of teachers and students of
the Goodwill Group of Schools. All financial commitment has been duly fulfilled by the school management. It is prohibited
therefore to commercialize this document in any form without prior formal discussion with the management.
Definition
Income part
It is made mostly on how much to spend or consume based on how much they may be expecting as
income.
Expenditure part
When income expected exceeds the expenditure or vice-versa we say we have an unbalanced budget.
However, when the projected income equals the expenditure we say we have a balanced budget.
EVALUATION
There are some reasons why the government has to plan a balanced budget, they are as follows;
(1) To finance important capital projects e.g. construction of roads, dams etc.
(2) To finance public goods that would be of benefit to all and sundry
(5) To finance economic enterprises that will provide goods this would be self-fiscal policy.
EVALUATION
- What are the reasons why the governments have to plan a balanced budget?
This material is NOT the property of Goodwill Group of Schools but has been adopted by the school management as
additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
prior formal engagement with school management. This material was developed for the use of teachers and students of
the Goodwill Group of Schools. All financial commitment has been duly fulfilled by the school management. It is prohibited
therefore to commercialize this document in any form without prior formal discussion with the management.
Sub-Topic 3:
Budget Surplus
Budget surplus means when the projected income or revenue is greater than the projected expenditures
in a given period of time. On the other hand, in this type of budget, not all estimated revenue is
proposed to be spent in that year i.e. there will be reserve. It is used to check inflation.
Deficit Budget
This is the direct opposite of surplus budget. When the government’s total proposed expenditure for a
period is greater than the total estimated revenue. For example in 2007 Nigeria has a total expenditure
of N2.52 trillion but could only realise revenue of N2.43 trillion. We can say that Nigeria has a budget
deficit of N0.9 trillion naira. It can be used to increase capital formation.
EVALUATION
- Define budget surplus
- Explain what you understand by deficit budget
Sub-Topic 4:
Ways of financing deficit budget and their effects (e.g. debt burden, debt relief debt buy back)
(1) Borrowing from the banking sector: - it can be financed through borrowing from the banks
or other financial institutions.
(2) Increase in tax: - government can also use fiscal policy like increase in tax to finance deficit.
(3) Borrowing from the banking sector: - deficit budget can be financed through borrowing from
the banks or other financial institutions.
(4) From the Central Bank: -Central Bank can lend money to the government from the reserve.
(5) Borrowing from internal source: - they can use instruments like bonds or development stock.
As we have positive effect also we have negative effect of deficit budget financing
Positive effect
This material is NOT the property of Goodwill Group of Schools but has been adopted by the school management as
additional teaching aid for teachers and students. Please this material should not be commercialized in any form without
prior formal engagement with school management. This material was developed for the use of teachers and students of
the Goodwill Group of Schools. All financial commitment has been duly fulfilled by the school management. It is prohibited
therefore to commercialize this document in any form without prior formal discussion with the management.
(1) It accelerates development and growth of a nation when the debts are channeled for
development purpose
(2) It assists in the financing of important capital, e.g. additional power plants to increase
electricity supply.
Negative Effect
(1) It can lead to fall in standard of living and deterioration of health condition.
(2) It may also lead to violent change in government. Nigeria’s case is a good example.
(3) Life expectancy may be short. Galloping inflation, unemployment and general economic
shortage may set in.
National or public debt refers to the debt a country owes to its citizens or other countries or
organizations such as the International Monetary Fund (IMF) and the World Bank. The debt which a
country owes its citizens is known as internal debt while the debt owed foreign governments and
organizations is known as external debt.
The government of Nigeria can use the following instruments to borrow money. These include;
1. Treasury certificate: these are securities for medium term borrowing. They are for a period of one to
two years and they carry higher rate of interest than treasury bills.
2. Treasury bills: these are securities used for short-term borrowing for about 90 days. This carries low
rate of interest.
3. National savings scheme: government can also borrow money from the national savings scheme to
finance its projects.
4. Development stock: these are referred to as government stock and they are used for long term
borrowing of up to five years and above.
5. Negotiations: the government can borrow from external financial institutions such as the Paris Club,
International Monetary Fund (IMF), World Bank, etc.
DEBT SERVICING: Debt servicing refers to the payment of interest on loans taken by the
government and the repayment of the capital sum at a future date.
DEBT MANAGEMENT: Debt management refers to a process or situation whereby the government
structures the country’s debts, which are dominated in foreign currency, with the fundamental aim of
reducing the total external debt stock.
The extent of the burden of national or public debt is determined by the type of debt, whether internal or
external, the purpose of the debt and the period of repayment.
A huge national debt can affect the economy of a country in the following ways;
1. The servicing of an external debt will involve an outflow of resources, which can otherwise be used
for economic development
2. It can reduce the availability of foreign exchange in the form of depleted foreign reserves.
3. The servicing of a large internal debt will limit government’s ability to provide social capital and
services for the people.
4. If a large internal debt is sustained by a high rate of interest, it will reduce private investment on
capital goods.
5. A large domestic debt will influence the distribution of income in the country.
6. A large external debt can make a country to be susceptible to the whims and caprices of external
creditors.
EVALUATION
GENERAL EVALUATION
Objective Test
(1) Budgets is categorized into (a) income and expenditure (b) naira and kobo (b) Nigeria and Ghana
(d) expenditure and money
(2) Negative effect of deficit budget financing is (a) it can lead to fall in standard of living (b) it can
boost the productivity (c) it can lower the individual income (d) none of the above
(3) One of the reasons for balanced budgets is (a) to build a beautiful house (b) to close recession gap
(c) to create employment opportunities (d) to make president happy
ESSAY TEST
(5) What are the reasons why the government has to plan a balanced budget?
REFERENCE TEXTS
WEEK 12-----EXAMINATION