This paper assesses the Thirwall's balance of payment(BOP) constrained model by applying it on the Nigerian economy and employing cointegration method to observe the relationship between economic growth and current account balance equilibrium. While extensive research study on economic growth concentrate on the neoclassical supply-oriented approach based on the production function and full employment, Harrod(1939) emphasized that demand generated growth determine long run economic growth and Thirwall developed a Keynesian perspective of the determinants of growth embedded on a dynamic version of the Harrod's foreign trade multiplier. Thirwall pinpoints the incapability of economic agents to increase aggregate demand indefinitely in open economies as justification for income growth differences across nations.
The balance of payment constrained growth model states that a country's economic growth rate is constrained by the desire to generate foreign exchange and reiterate the function of demand as the motivation for domestic growth. This arises because growth in export and investment growth in import substitution are the only aspect of aggregate demand that can increase GDP growth and reduce foreign constraints. This implies that growth rate is constrained by the balance of payment as the economy cannot grow faster than what is consistent with the balance of payment equilibrium. The principle of this Keynesian demand side growth theory is that export capability and import attitude establish long run economic growth. Income derived from external trade constitute the principal medium to finance growing import due to a rise in domestic activities. This model differ from the supply induced growth models which evaluate economic growth by using factor inputs such as savings, human and physical capital, population growth and initial per capital GDP on economic growth. Reservations about the traditional growth models stem from the fact that the factor inputs have inconclusive roles in the growth process in developing countries. Also a lot of the neoclassical assumptions have been observed to be unapplicable in developing or transition economies.
The balance of payment constrained model infer that economic growth are stimulated by demand factors and the main constraint on demand is the balance of payment.
Table of Contents
1. Introduction
1.1 A review of the Nigerian economy
2. The Balance of Payments Constrained Growth model
3. Empirical Analysis and Findings
4. Conclusion
Objectives and Topics
This paper assesses the applicability of Thirlwall’s balance of payments constrained growth model to the Nigerian economy, investigating how external constraints and trade dynamics influence long-term economic growth.
- Application of the Thirlwall/Hussain growth framework to Nigeria
- Evaluation of the relationship between export performance and real GDP growth
- Use of cointegration methods to determine long-run equilibrium
- Analysis of structural economic shifts in Nigeria from 1960 to 2012
Excerpt from the Book
The Balance of Payments Constrained Growth model
Thirlwall’s balance of payment constrained growth model is based on the notion that no country can grow faster than the rate consistent with its balance of payment equilibrium on current account, unless it can finance ever growing deficit, which in general it cannot . This insinuates limitations to the deficit/GDP ratio and international debt/GDP ratio, beyond which financial markets get nervous. Thirlwall BOPC model asserts that long run growth is founded by the dynamic Harrod foreign multiplier, which states that the pace of industrial growth can be explained by the principles of the foreign trade multiplier. The balance of payments equilibrium growth model can be stated as:
PdX + EF = EPzM (1)
Here, Pd and Pz are the domestic price and foreign price, E is the exchange rate, X and M represents exports and imports,F denotes capital inflows. From eq(1), the share of export as a ratio of total earnings can be stated as:
θ = PdX / (PdX + EF) (2)
Summary of Chapters
1. Introduction: Outlines the theoretical motivation for using Thirlwall’s model and provides a historical context of the Nigerian economy and its trade dependencies.
2. The Balance of Payments Constrained Growth model: Derives the mathematical foundation of the model, establishing the link between trade variables, price elasticities, and output growth.
3. Empirical Analysis and Findings: Details the statistical procedures including unit root tests and Johansen cointegration tests to evaluate the empirical validity of the model using Nigerian data.
4. Conclusion: Summarizes the study's findings and affirms that Nigeria's long-term growth is significantly constrained by balance of payment factors and export performance.
Keywords
Balance of Payments, Economic Growth, Nigeria, Thirlwall’s Model, Cointegration, Export Performance, Foreign Trade Multiplier, Macroeconomics, Import Substitution, Time Series Analysis, Structural Adjustment, Trade Openness, GDP, Income Elasticity, Economic Development.
Frequently Asked Questions
What is the core focus of this research?
The paper examines whether Nigeria's long-term economic growth is constrained by its balance of payments, using the theoretical framework developed by Thirlwall.
Which central themes are explored?
The study explores the dynamics between exports, imports, international trade prices, and domestic output within an open economy setting.
What is the primary objective of the study?
The goal is to determine if the Thirlwall model accurately explains the determinants of economic growth in Nigeria between 1960 and 2012.
Which scientific methodology is employed?
The research utilizes time-series econometric methods, specifically Augmented Dickey-Fuller (ADF) tests for stationarity and Johansen cointegration tests.
What topics are covered in the main section?
The main section covers the derivation of the BOPC model, a historical review of the Nigerian economy, and the empirical testing of the data.
Which keywords best characterize the paper?
Key terms include Balance of Payments, Economic Growth, Thirlwall’s Model, Cointegration, and Nigeria.
How did historical events like the oil boom affect the model's application?
The paper discusses how periods like the 1980s oil price fluctuations and subsequent structural reforms created volatility in export and GDP data, which the cointegration model aims to account for.
What policy implications are suggested by the findings?
The findings suggest that Nigeria should focus on export diversification and upgrading to reduce reliance on external constraints and achieve faster per capita growth.
- Quote paper
- Emmanuel Igbinoba (Author), 2014, Balance of Payments Constrained Economic Growth in Nigeria, Munich, GRIN Verlag, https://www.grin.com/document/299168
