ABSTRACT
This work sets out to examine the relationship between balance of payment and exchange rate. The work is divided into five chapters; chapter 1 gives a general introduction to the subject matter, chapter two gives the general review of literature in the subject matter, chapter 3 gives or states the methodology and specifies the model used for testing. Chapter four runs the required test and provides the result as well as the interpretation and chapter five concludes the findings and recommends policy for the government based on the findings in the test.The ordinary least square regression (ols) method is used to test for R-squared test (explanatory power of the variables), T-test for the reliability, F-test for the overall significance of the exponentials and D.W test which is the econometric criterion for testing for presence of auto regressive scheme. The result shows a negative relationship between balance of payment and trade openness, also there exists a positive relationship between exchange rate and foreign direct investment. Since trade openness has a negative impact on the balance of payment it is recommended that the government should not consider it a policy for economic development.
CHAPTER ONE
GENERAL INTRODUCTION
1.1 BACK GROUND OF STUDY
Right from time immemorial, a country’s exchange rate and balance of payment is usually regarded as the sum of indices by which a nation’s strength can be measured especially its economic strength. Paul (1996) defines balance of payments as an accounting record to all monetary transactions between a country and the rest of the world.
These transactions include payments for the country’s exports and imports of goods, services and financial capital, as well as financial transfer. It summarizes the international transaction for a specific period usually one year and is prepared in single currency for the country concerned. Nzotta (2004) defines foreign exchange as the value of foreign nation’s currency in terms of the home nation currency. In finance, the exchange rates (as also known as the foreign exchange rate or forex rate) between two currencies specify how much one currency is worth in terms of the other.
Devaluation is tall in a fixed exchange rate, which reduces the value of a currency in terms of other currencies. So what we are trying to do in this study is to determine how the reduction value of a currency with respect to the currency of another country affect the record of all monetary transactions between a country....
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