Exchange Rate Fluctuation and Home Made Goods

In: Business and Management

Submitted By WISEONE
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1. INTRODUCTION

The term “Exchange rate” is referred to as the value of the money of one country compared to the money of another country exchange rate movement is therefore the fluctuation in the value of a country’s currency when compared to another country at particular time period. The importance of foreign exchange rate on inflow of foreign private investment has been traced by Obadan (1994) who noted that its importance as the center pieces of the investment environment derives from the argument that a sustained exchange rate misalignment in terms of over-valuation or under-valuation is a major source of macro economics disequilibrium which spells danger for investment. A stable exchange rate encourages, foreign and local investor into such an economy. This is because, an over-valued exchange rate discourage export and negatively affect the foreign private investment Salako (2004). Further state that there is a long run equilibrium relationship between investment inflow to Nigeria and variables such as nominal effective exchange rate. A high foreign exchange rate increase the prices of goods and services and discourage exportation while at the sometime encourages importation of goods which are cheaper. This has negative effect on the investment and with such factors investors withdraw their money from such an economy (Solomon, 2012). It is therefore imperative to state that foreign exchange rate is a significant factor that determines investment in any economy with Nigeria inclusive. In recent years, exchange rate has fluctuated considerably. The official and parallel exchange rate depreciated annually at an average of 34% and 18%, respectively, between 1986 and 2006 (CBN, 2007). The effects of such fluctuations are evident. Inflation experience during the same period has gone through episodes of creeping to moderate and from…...

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