SCHEME OF WORK

1) Elementary treatment of fiscal policy

i. Meaning of fiscal policy in public finance
ii. Objectives of public finance
iii. Revenue allocation (including resources control)
iv. Sources of government revenue
2) Elementary treatment of fiscal policy
i. Direct and indirect taxation
ii. Effects and incidence of taxation
iii. Structure and effects of public expenditure on government
structure
3) Balanced and unbalance Budget
i. Meaning of balance budget
ii. Reasons for balanced budget
iii. Meaning of surplus and deficit budget
4) Balanced and unbalanced budget
Ways of financing deficit budget and their effect e. g (debt buy back)
5) Element of National income Accounting
i. Meaning of National income concept and their uses
ii. Ways of measuring national income and their limitation

Both fiscal and monetary policy are an attempt to reduce economic

fluctuation and smooth out the economic cycle. The main different is that
monetary policy uses interest rates set by the central bank.
Fiscal policy involve changing of government spending taxes to influence
the level of aggregate demand.
6) Elements of national income accounting
i) Uses and limitations of national income estimate
ii) Trend and structure of national income
7) Types of financial institution and their function
i) Money market institution
ii) Capital market institution
iii) Other market agencies
8) Types of financial institution and their function
i) Functions of capital market institution
ii) How the stock exchange operates
 iii) Secondary/primary market
9) Money: Demand for and supply of money
(i) Determination of supply and demand for money
(ii) Value of money and price level
10) Money: inflation and deflation
i) Meaning and types of inflation
ii) Causes and effects of inflation and deflation
11) Money: i) Control of inflation and deflation
ii) Inflation in Nigeria
12) Revision
13) Examination
WEE DESCRIPTION
K
1 ELEMENTARY TREATMENT OF FISCAL POLICY
Fiscal Policy: It can be define as the use of income and expenditure instrument
or policies to control economic activities.
It is an action by the government for the purpose of raising revenue through
taxation and other means and the pattern of expenditure to be applied
Some policy is used to remedy adverse condition is an economic such as
inflation, deflation balance of payment, deficit, low level of productivities,
unemployment, economic recession or depression

OBJECTIVES OF FISCAL POLICY

1. Control of inflation:- It is used by government to control inflation. This is
done by increasing tax on personal income and reducing government
spending
2. It aim at improving the level of productivity in an economic. This is done
by reducing company profit taxes, granting tax holiday giving subsidies to
agricultural and industrial producers etc
3. Creation of employment:- It can be used to reduce unemployment by
increasing expenditure on employment generating ventures which giving
way to more employment opportunities
4. Revenue generation: Through fiscal policy, the government ensure the
generation of high revenue for the country.
5. To correct balance of payment deficit:- It aim at correcting balance of
payment deficit. This is done by increasing importation duties granting
subsidies to infant companies and reducing export duties.
6. It is used to check deflation or recession:- the personal tax is reduced and
government expenditure is increased.
7. Distribution of income:- It is used to ensure equal distribution of the
nations resources or wealth
 8. A good fiscal policy also ensure the rapid development of the economy
PUBLIC FINANCE
Public finance is an aspect of economics that has to do with how government
generate revenue, how she spend the money and its effects on other economic
activities

It can also be define as a financial activities of government as it relate to revenue

or manage expenditure and debt operation and the overall effects on the
economy.
It deals with borrowing and lending, receiving and spending by the Federal,
State and Local government and their agencies so as to create impact on
individuals and corporate bodies.

OBJECTIES OF PUBLIC FINANCE

1. To meet the social needs of the citizens with area of health, education,
water and read construction etc.
2. Equitable distribution of income: it ensure that income accruing to the
country is fairly and equally distributed to various aspect of the economy
3. Employment: It is sued to stabilize the nation’s economy through the
provision of industries, employment opportunities, and control of
inflation.
4. To provide the defense and security of the country and external relation
5. To meet government recurrent expenditure on salaries of public sector
employees.
6. To finance capital investment on infrastructure and public work, general
administration etc.
7. Good fiscal policy:- it ensure that good fiscal policy is attained
8. Stabilization of price:- it helps to stabilize the price of goods and services.
In order to prevent frequent fluctuation of price, inflation etc.
REVENUE ALLEGATION (INCLUDING RESOURCE CONTROL)
Revenue allocation is the distribution or sharing of total income or revenue. It
involves a complex process that entail how and where to allocate revenue in
order to ensure the viability of debt and maintain operating structural of the
organization.
In Nigeria, revenue allocation is the distribution of national income, among the
three tiers government and various sector of the economy.
Special find is usually given to mineral producing area to solve ecological
problems etc.
Federal government has the largest share followed by the state and the local
government.

SOURCES OF GOVERNMENT REVENUE

1. TAXES: there are revenue from compulsory levy or payment made by
citizens through direct tax which include personal income tax company
profit tax (capital gain and transfer tax poll tax) and indirect tax which
include custom duties (duties in import and export excise tax (taxes on home
produce good) tariff sales, and purchase tax etc levies on good and services
2. BORROWING/LOAN: This is the amount of money that government can take
or loan from industrial and corporate organization within and outside the
country (from home or foreign) external and internal.
3. FEES: This include money generated from court fees, registration of business
payment for passport to travel outside the country fees paid in institution by
student’s hospital charges etc.
4. GRANT/AIDS/GIFT:- These are assistance of money in kind or cash received
by government from richer and friendly country.
5. LICENCE: Money generated through a wireless set, radio, television, arm,
vehicle, driving license, import license etc.
6. Profit or earning from commercial ventures by government (public
enterprise) yearly divided received by government from company purely
owned by government shares from firm partly owned by government and
proceed from the sale of certain product or services by government agencies
 or corporation.
7. OIL RELATED TAXES:- revenue generated through the use of public land and
building from companies that are granted the right to exploit mineral
deposit, these includes mining, rent and royalties, petroleum profit tax, NNPC
earning and earning from direct sales abroad and domestic sales from
ferrying (taking) a car across the sea or river etc.
8. RENT&RATES: This includes earning from water, properties, housing by
government etc.

TAXATION
Taxation is the act of imposing a compulsory levy or payment by the
government or its agencies on individual and firm or on good and services.
TAX: it is a compulsory contribution or payment imposed by government or its
agencies on individual and firms or an goods and services to ensure their social
and econ. Welfare.
The fact that taxation is compulsory does not mean it is meant to be paid by all.
It is only meant to be paid by all.
It is only meant for a class of people called tax-able persons
ELEMENT OF TAX
1. Task base: it is the item or object which is taxed. that is, taxes have to be
levied on some or other basics
Three main tax bases are used in Nigeria
namely: personal income Tax
a. Income
Company Tax
b. Capital – capital gained tax
c. Consumption Exercise duties

Value assed fax (VAT)

2. TAX RATE: this is the percentage of task paid an item/object e.g 5% personal
 income tax.
Tax payment 100
VAT 5% VAT
Tax base
x 1

TYPES OF TAX
a. Direct tax b. indirect tax
1. Direct tax: is a type of tax imposed directly on the income of individual or
organizations by the government or its agencies such income include wages
and salaries, profit, rent and interest. The tax payers are usually aware of
the payment of such tax the burden of these tax is borne by the payer
EXAMPLES OF DIRECT TAX ARE:
a. Personal income tax: this levied an income of individuals
b. Company tax (corporate tax ) is tax levied on profit made by company
c. Capital gained tax: is a tax levied on the gain or profit derived from the sales
of the land and capital assets
d. Capital tax: is a tax levied on property or capital asset
MERITS/ADVANTAGES OF DIRECT TAX
1. Progressive: it is usually administrated with a graded scale. I.e. the higher
the income the higher the tax
2. They are won inflationary: they are not increase price because money is
taken away from customers and their purchasing power.
3. Reduced in inequality income: it is used to ensure the redistribution of
income as the poor pay less while the rich pay more.
4. It is easy to estimate revenue accruing to the government from direct tax
5. Tax liability is certain: the tax payer knows what to pay and governments
know what is expected to collect
6. They are convenient to pay
7. They are cheap to collect
DEMERITS/DISADVANTAGES OF DIRECT TAX
1. They reduce the purchasing power of the tax payer
2. High incidence of taxation can discourage hard work as they believe that the
 more someone work hard, the higher the ta the person has to pay
3. They discourage investment : high taxes on individuals or corporate bodies
ma discomfort other potential investors
4. It discourages saving
5. They are prone to tax evasion

INDIRECT TAX
Indirect tax are taxes levied on goods services the producers or sellers bear the
initial burden of the tax before shifting then to the final consumer in form of
higher prices the tax payer under indirect tax are usually not aware o the
amount paid as tax
TYPES OF INDIRECT TAX
1. Custom DUTIES OR TARIFE: groups in 2
a. Import duties: are taxes levied on goods brought or imported into a country
from other countries the importer bears the initial burden
b. Export duties: are taxes levied on goods exported to other countries the
exporter bears the initial burden
2. Sales tax: these are taxes levied on the sale of certain commodities the tax is
collected either at wholesale or retail stage and passed on to the customers
in form of higher prices
3. EXCISE DUTIES: theses is a tax levied on certain goods within a country
4. Purchase tax: are taxes levied on certain consumer goods/commodities e.g
cars, television
5. (VAT) value added Tax: this is a tax imposed on goods and services of each
stage of production the burden of this tax is finally borne by final consumer
CLASSIFICATION OF INDIRECT TAX
1. AD VELORED TAX: this is a form of tax impose on commodity in accordance
with their respective value at specific percentage of tax than essential goods
2. Specific tax: in this type a fixed amount or sum is levied per unit of
commodity irrespective of its value e.g equal percentage Is levied on both
luxury and essential commodities
MERITS/ADVANTAGES OF INDIRECT TAX
1. source of sustainable revenue for government
2. protection of infant industries by imposing heavy taxes on imported goods
3. to correct balanced of payment deficit
4. easy and cheap to collect because the tax is paid as soon as a consumer
purchases a tax commodity

(DEMERITS/DISADVANTAGES OF INDIRECT TAX)

1. It increases the price of goods and services.
2. The amount of revenue to be generates is uncertain
3. They are repressive in nature to because the tax burden fall heavy on the
small scale income earners both the rich and poor pay the same amount
on the same type of goods
4. They are inflationary nature since the producer cost of production are
increased the by taxation they will charge high prices

SYSTEM OF TAX (DIRECT TAX)

1. Progressive Tax – Is a type of tax in which the tax rate increases as the
income, stock of wealth or value of property to be to be taxed increase.
The higher the income the greater the tax and vice versa
Example of a progressive tax is pay as you earn (PAYE)

2. Repressive Tax: Is a type of tax in which tax rate increases as Income or

stock of wealth increases. That is the higher the income the lower the tax
rate. The burden of this tax fall more on the low income earners.
3. PROPORTIONAL TAX: This is a form of tax in which the rate of tax is the
same irrespective of the level of income or wealth. That is tax payer the
same percentage or proportion of their income or wealth.
Example company tax.

REASON WHY GOVERNMENT IMPOSE TAXES

1. To protect infant industries: This is done by imposing high taxes on
forage goods to protect newly established industries from competitive
with foreign firms
2. To prevent dumping: This is done by imposing high taxes on foreign
goods to discourage their information
3. To correct unfavorable balance of payment: this is done by increasing
taxes to discourage importation and consumption of foreign goods age
the reducing excise duties in order to encourage the production and
consumption of locally made goods.
4. General administrative propose: It fore on of the major source of

5. Defence purpose: Taxation contribute to use for defending the country

against external attack.
6. To redistribute income: Through the pay as you earn (PAYS) System the
government can narrow or reduce the gap between the rich and the poor
by introducing progressive taxation.
7. Provision of social amenities: part of the money generated from taxes
used to provide social amenities e.g road
 INCIDENCE OF TAXATION
Incidence of taxation Is the pomtat which the tax burden finally rest.
Burden refers to the amount paid as tax it show how the real burden of tax lies
on persons (buyers or sellers)
The incidence or burden of taxation therefore lies on the person who finally
pays the tax.

TYPE OF INCIDENCE.
The incidence of taxation could be (1)
 Formal incidence 2. Effective incidence.

---- FORMAL INCIDENCE: This refer to the initial first effects of tax on the object
i.e. the tax payer. It shows where the initial burden of taxation lies. For example
the incidence or payer and in indirect tax, the producer bears the initial burden
---- EFFECTIVE INCIDENCE: It makes refers to who finally bears the burden of
taxation indirect tax, the tax payer bears the full (Initial or formal) burden of
taxation.
In seller, buyer or booth of them will shame it depending on the elasticity of
demand for the commodity.
 When demand is perfectly elastic, the incidences of indirect tax will fall in
the seller.
 When demand is fairly elastic, the incidence of tax is share between buyer
and seller.
 If demand is inelastic, the tax burden fall only on the buyer of the taxed
commodities.

STRUCTURE AND EFFECTS OF PUBLIC EXPENDITURE ON GOVERNMENT

BUDGET.
 Public Expenditure is the total expenditure incurred by public authorities in
the local state and federal government.

STRUCTURE OF PUBLIC EXPENDITURE.

(a) Recurrent Expenditure: there are expenses which are repeated on a
yearly or regular basis.
In this case they are not permanent e.g wages saline’s, gratuities and
pension fund.
Transfer payment which include subsidies of various type, assistance to
sister countries public/ National debt servicing loads statution and non-
statutory allocation of the state.

(b) Capital expenditure: the expenses on major project of permanent nature.

They include acquisition of ship, building, hospitals, schools, jams,
bridges, water supply, construction of reads and all permanent assets

ITEMS ON PUBLIC EXPENDITURE

The main items on public expenditure are;
1. Economic Infrastructure like road, electricity, telecommunication,
railway/ airport etc.
2. Social infrastructure: e.g health care, education, recreation etc.
3. Defence: Army, navy, police law court etc.
4. Economic Activities/ production e.g aghast trade. Industries etc.
5. Debt servicing and other transfer payment and other transfer payment
6. Administration.

EFFECTS OF PUBLIC EXPENDITION

1. Effects on production: expenses in the establishment of industries and
increase in wages and saline’s by the government with result to increase
 in income of individual which lead to high purchase power.
This will also increase demand which lead to increase on production.

2. Effects on distribution of wealth: government expenditure help to

redistribute income or wealth of the nation for example, provision of free
education, free medical care and low cost housing will benefit the poor
and by so doing, help in alleviating poverty and redistributed wealth.
3. Effect on employment: Government expenses in the establishment of
industries and setting up of employment agencies would go a long way in
generating employment opportunities for the people.
4. Effect on price level: When government increase of expenditure without a
corresponding increase in output this lead to high volume of money in
circulation. This may lead to higher prices and inflation.
5. Effect on economic stability: public expenditure create wide effects on
the empowerment in infrastructural facilities increase social overhead,
maximum social advantage, welfare, safety, reducing inequality
improvement in standard of living etc.

BALANCED UNBALANCED BUDGE.

A budget can be define as a financial statement of total estimated
revenue and proposed expenditure of a government in a given period of
time usually a year.
Types of Budget
Budget can be grouped intio:
a. Balance budget
b. Surplus budget
c. Deficit budget.

A. A balanced budget is a budget in which the planned expenditure of

 government is e equal to the revenue
In other words, balance budget occur when the total estimated
revenue of government equal to proposal expenditure.

REASON FOR BALANCED BUDGET.

1. It prevent large debt burden
2. It is used to control expenditure or financial expenses of government
3. It prevent financial insecurity
4. It helps to reduce interest payment on loans
5. It aids or increase saving by government.

B. SURPLUS BUDGET: This is when government revenues or income is

greater than its expenditure. That is when government plan to
generate more revenue or income than it planned to spend.
A surplus budget maybe created to reduce economic activities by
and borrow, thereby reducing consumer purchase power the demand
for goods will fall and price may also fall

C. DIFICIT BUDGET: This is when government planned revenue or

income is less than planned expenditure, that is when government
plan to spend more than it generate, this may be done to expand the
economic by cutting taxes increasing public expenditure and raising
loan and may reduce unemployment.

WAYS OF FINANCING DIFICIT BUDGET AND EFFECTS

1. Printing and minting: Government can raise funds by printing more
money to finance the deficit budget.
This method is delicate because excessive printing and circulation
of money lead to inflation in the economy.
2. Increase in taxation: a tax is a compulsion contribution levied on
individual and company once tax is levied it can reduce the income of
consumers and company’s profit and thereby reducing the aggregate and
output respectively.
3. GRANT AND AIDS: These represent Financial support from richer
nations, institution and corporate bodies to those that are less privileged
without a repayment clause.
This could increase the economic growth of a country and beast their
standard of living.
4. LOANS: This can be sourced from banks capital market and other
financial institution. It is a temporary mean of generating revenue
because it is indebtedness that require repayment when such loans are
property managed, it can lead to debt burden.

EFFECTS OF FINANCING DEFICIT BUDGET

1. Excessive money in circulation leads to increase in the price of goods and
services.
2. It reduces the purchasing power of people.
3. Deficit budget can cause inflation. This is because there is too much
money chasing few goods and services.
4. It causes depression of currency. That is lower the value of that country’s
currency
5. It leads to decrease in social and economic life of citizens

DEBT
A debt is a contractual obligation of owing or accumulated borrow with a
promise to pay back at a future date.
 National or public debt: This is the sum total of debt owned by the gov’t
of a country both internally and externally. The debts may or may not be with
interest. Loan/Borrowing constitute some of the sources of funds to the gov’t

 Instrument or Sources of Gov’t Borrowing

I. Treasure Bills: The gov’t may use treasury bill which last for 90 days
(short term borrowing)
II. Treasury Certificate: this is use for medium term borrowing of about 1-2
years.
They carry higher interest rate than treasury bill and by negotiation case
of external borrowing.
III. Gov’t stock/ Development stock ( long term borrowing)
IV. Negotiation from external financial institute like IMF, work bank, pains
Club etc.

TYPES OF NATIONAL DEBT.

a. Internal debt
b. External debt
c. Bilateral debt
d. Short term debt
e. Long term debt
DEBT BURDEN: It is the cost of servicing debt for consumer. It is the cost of
interest payment on debt .The debt burden will be higher for credit cards and
loans with high interest. The debt of mortgage will be relatively low compared to
value on loan for countries debt burden is the cost of servicing public debt
burden ratio is the ratio of debt burden to income e.g If you pay N2000 in debt
interest and have an income of N40, 000, year debt burden ratio is 5%.

DEBT RELIEF: Is the total or partial forgiveness of debt or the stopping of debt
growth owed by individual, corporation or nation From at antiquely through the
century it refers to domestic debt in particular agricultural debt and freeing of
debt slaves.

DEBT BUYBACK: Is the liquidation of an existing debt through the offer of a

substantial discount i.e it is the purchase by a country of its own outstanding
debt at a discounted price due to a debt crises.

ELEMENT OF NATIONAL INCOME ACCOUNTING

1. National income is the total monetary value of all goods and services
produced main economy country or the total income earned in a given
country over a period of time usually a year. It is the value of the volume
of goods and services produced or the total income earned in a country.

CONCEPTS OF NATIONAL INCOME ACCT.

1. PERSONAL INCOME: Is the amount of income an individual earn a
productive services currently rendered by him or his property e.g wages,
interest received by an enterprise.
If can also be define as the income or amount of money received by
individual or househots over a period of time. It helps to improve
earners, standard of living.
2. DISPOSABLE INCOME: This is the income or amount of money left for an
individual or househots for spending and saving after the deduction of
personal income tax.
3. GROSS DOMESTIC PRODUCT (GDP): It can be define as the total
monetary value of all the goods and service produced in a country at a
particular period of time______ but excluded net income from Abroad.
It can also be defined as the monetary values of all goods and services
produced by the resident or people living in a given country irrespective
 or their nationalities.
All goods imported into the country are excluded. It helps to determine
the production capacity and the level of employment of a country. It is
used to measure the rate of growth of the economic.
4. GROSS NATIONAL PRODUCT (GNP): It is the total monetary value of all
goods and services produced by the nationalist. (Citizen Indigenes) of a
country irrespective of where the reside or are living in a year.
5. GNP: Is concerned with the total money value off all goods and services
produced by the citizens of a country.
It excludes the contribution of foreigners to the GDP and includes the
earning of a given country residing abroad
GNP= GDP+ NET income from abroad = exports, M= Imports
6. NET NATIONAL PRODUCT (NNP) The NNP may be defined as the
difference between GNP and the depreciation is equal to NNP. The
deductions made from a country’s fixed capital as a results of wear and
tear is what is known as depreciations to arrive at the true monetary
value of the national product. The deductions made for depreciation must
be substandard from GNP.

NNP=GNP- Depreciation or capital consumption allowance.

7. PER CAPITAL INCOME: Maybe defined as the total GNP of a country dined
by her total population. It gives you the average income in a given
country and it serves as an economic indicator of the level of standard of
living and development, therefore what per capital, income in a given
country will be- whether higher or low depends mainly on the available
resources and the total number of people in the country.

Per-capital income= Total national income estimate

Total population e.g zero
It can also be define as income per head of the population. It is the ratio
of the GNP to the population of the country. It is used to measure the standard
of living of citizens of a country.

WAY OF MEASURING NATIONAL INCOME AND THEIR LIMITATION

1. Income approach / techniques/ method
2. Expenditure approach/ techniques/ method
3. Output approach/ techniques/ method.

IMCOME APPROACH: The total monetary values of income received by

individuals business, organization, government agencies etc. are calculated OR:
It can be obtained by adding income received by the factors of production.
This income includes,
Interest+ Ways and Salaries+ Rent+ Profit/ dindends
received and made in a given period of time usually a year.
N.I= W&S+ R+ I+P
However, all income received without a corresponding supply of goods and
services such as transfer payment, gift, pension, relief etc. must be excluded in
the calculation to avoid counting.

Example of national income statement using income approach,

ITEMS ANMOUNT
 Capital consumption allowance 218.08
 Indirect business tax 250.20
 Compensation of employers (salaries/ Wage)
Form of social loans pension etc. 1570.40
 Rent 52.32
 Interest 100.40
 Proprietors income 168.40
 Corporate income tax 111.80
 Undistributed corporate profit 50.80
  Dividends 55.60
 G.N.P 25.78

(2) EXPENDITURE APPROACH

It is the calculation of the total monetary values of
expenditure on goods and services by individual organization,
government etc.
Within a country in a given period of time. It measures the
expenditure on currently produced final goods and services by the
household firms and government + Net export.

NI= C= I= G (X-M) + Subsidies --------

Taxes – Depreciation (capital consumption

Example of expenditure approach

 Receipts Amount
- Personal consumption expenditure 1,608
- Government purchase of goods and services 554.2
- Gross private domestic Investment 404.2
- Net export 11.6
- GNP 2578

Note:
C= private consumption expenditure

I= Private investment expenditure

G= Government Expenditure on consumption and investment

X= Exports

M= Imports

(3) OUTPUT/ product Approach

 It measure the monetary value of all goods and services
produced by various & sector of the economy in a year. In this
method, the value of net contribution of each sector is added.
This is the figures are collected on the basis of value added.
Value added is the value of output, less the cost of input e.g
output___ Input

ITEMS Amount
Agriculture, Forestry and fishing 840
Mining, quarrying 200
Transport and communication 150
Manufacturing 410
Building and construction 170
Banking finance and insurance 210
Wholesale and retail trade 120
Government services (health Education, Defence) 205
Community social and personal services 63
Other services 60
G>D>P 2428
Net income from Abroad 140
G.N.P 2,578

USES OF NATIONAL INCOME.

1. It is used to measure the standard of living through the
income and expenditure of people in a country in relation to
others.

2. Influence foreign Investors: It is a useful guide to investors

who want to invest in the country. It helps an investor to
invest and know whether to invest their capital in a country
or not

3. Economic planning: A nation uses her national income

statistic in embark on both short and long term planning. An
increase in National income indicates Favourable economic
 activities while a fall indicates economic slump.

4. Redistribution of income It enable the government to

design polities towards redistribution of resources and
revenue among sectors of the economy.
5. For future Forcast: It is used to forcast the future rate of
economic growth and development

6. It is used to assess economic performance it determines the

economic situation of a country by measuring the economic
growth whether the economic is growing or not.

PROBLEMS OF MEASURING NATIONAL INCOME

1. Double Counting: in computing national income, received or
payment made for current legismate supply of goods and
services are consider but some goods are counted twice
gives false national income estimate.

2. Subsistence production: This is this the production to

sustain the family alone and generate small money e.g
farming, tailoring which make estimation difficult.

3. Unreliable Estimate incomplete information: Most

developing countries do not have adequate record keeping
to give their income returns.

4. Difficulties in Estimating Net Valuation: The value of net

income from abroad. This is because many people may be
involved, hence making adequate assessment impossible.

5. Problem of valuation on capital stock: depreciation which is

the wear and tear of the machine or assets is difficult to
determine the value of depreciation of fixed assets because it
is difficult to know what true depreciation is.

6. Inability to quantity some services: some services are not

easily qualified. Thereby affecting the estimation of national
income e.g house wives services.
 7. Problems of inflation (change in the value of money): The
national income figure can over or under estimated as a
result of inflation or deflation.

8. Insufficient technical expertise for collecting and analyzing

the data.

9. Ignorance and illiteracy

LIMITATION OF NATIONAL INCOME ESTIMATE:

1. The figure does not tell us about the distribution of income:
It does not indicate whether income is widely spread or
concentrated in a few indicated in a few individual.

2. The figure does not correctly measure welfare since hazards

of development like pollution congestion etc. are not taken
into account in the figures.

3. National income is always limited in monetary value and not

in physical utility: It does not tell as how many good and
services are produced.

4. Differences in structure of production where subsistence

production exists output is likely to be under estimated than
a country with a large or market economy.

5. Charges in value of money: This makes at difficult to

compare national income.

TYPES OF FINANCIAL INSTITUTIONS AND THEIR FUNCTIONS.

1. Money market institution can be defined as a market for

short term loan. It consists of individuals or institution that
either has excess money to lend or wish to borrow on a short
term basis.

INSTRUMENT IN THE MONEY MARKET.

1. Treasury bills: It is issued by the central bank which assists
 the government to borrow money on short term basis

2. Bill of exchange: It is a promising note which shows the

acknowledgment of indebtedness by a debtor to his creditor
and his intention to pay the debt on demand or at an agreed
time. It usually last for 90days

3. Call money fund/ market: It is a special arrangement in

which the participating institution invests surplus money for
their money for their immediate requirements on an
overnight basis with the interest and withdraw able on
demands

INSTITUTION INVOWED IN THE MONEY MARKET:

I. Central bank
II. Finance house
III. Discount houses
IV. Acceptance houses
V. Insurance companies

ADVANTAGES OF MONEY MARKET

I. Creation of finance
II. Through investment extra income is created
III. It promotes economic development
IV. It is easy to recall funds invested
V. It enhance serving.

< Capital Market Institution: It is a market for medium and

long term loans. It a market for medium and long term loans. It
serve s the need of industrial and commercial sector.

INSTRUMENT USED FOR CAPITAL MARKET

1. Stock
2. Shares

Stock and shares are securities purchased by individuals as

 an evidence of contributing part of the total capital used in
running an existing industry.
Stock and shares holders received dividends at the end of a
normal business year.

INSTITUTION INVOLVED IN A CAPITAL MARKET

1. Issuing houses
2. Building society (mortgage banks)
3. Stock exchange
4. Insurance company
5. Development bank
6. National provident fund (N.P.F)
7. Investment banks
8. Investment trusts

ADVANTAGES OF CAPITAL MARKET

1. It provides long term loans to private and public sectors.
2. It wrote or helps the growth and development of merchant
banks
3. It mobilizes saving
4. It encourages the general public to participate in the running
of the economy
5. Provision of investment advise
6. Other Market/ agencies that can access the capital market
are central security clearing system (C.S.C.S) is one of the
arms of stock exchange market. It is an independent
organization which perform the clearing and settlement of
transaction for the stock exchange.

FUNCTIONS OF CENTRAL SECURITY AND CLEARING (C.S.C.S)

1. Central security and clearing system ensure the settlement
of transaction.
2. It acts as sub-register of all companies
3. It is a central depositary of certificates
4. It issues central security identification number to stock
brokers and investors

TYPES OF FINACIAL INSTITUTIONS AND THEIR FUNCTIONS

FUNCTIONS OF CAPITAL MARKET INSTITUTIONS
Their main function are to:
1. Finance the economy
2. Promote liquidity in the market
3. Provide funding alternative
4. Efficient price discovery.

HOW STOCK EXCHANGE OPERATES

1. PRIMARY MARKET: It is a market for new long term capital.
It is a market where new securities are sold for the first time
( It is also called new issue market NM)
The securities are issued directly to investors.
The primary issues are used by companies for setting up
new business expansion of modernizing the existing bussing.
Securities Certificates is used to investors. The primary
function of the primary market is capital formation in the
economy.

A. METHOD OF ISSUING SECURITY IN THE PRIMARY MARKET

1. Initial offing
2. Right issue (For existing companies)
3. Preferential Issue.

B. SECONDARY MARKET: Is a market for trading securities that

have already been issued in an initial private or public
offering
Once a nearly stock is listed on a stock exchange,
investors and speculation can easily trade on the exchange

TYPES AND FEATURES OF SECURITIES.

 Securities and financial instruments which are traded on the
stock exchange market

TYPES OF SECURITIES.
1. DEBENTURE: These are long term loan. It represent the
document which shows or acknowledge rate of interests

2. BONDS: It is used to raise fund by government form the

stock exchange market. They have fixed rate for interest and
 coupon rate.

At redemption the issuer pays the normal value of the

bond to the helper.

3. SHARES: It is the unit of capital of a company allocated to

individuals. They are issued by a quoted company and are
trades on the stock exchange market. It can be grouped into
ordinary shares and preference share

4. STOCK: Stock maybe defined as a collection of shares into a

bundle on consolidated share.

DEMAND FOR AND SUPPLY OF MONEY

1. Demand for money : this is the desire to hold money in liquid
for (Cash) rather than investing such money in loan stock
and share etc.

REASONS OR MOTIVES FOR HOLDING MONEY.

LORD JOHN MAYNARD KEYNE (1833-1948) gave three
reasons/ motive for holding money.

1. TRANSACTIONARY MOTIVE: people hold or keep money in

order to enable them obtain or buy their daily needs or meet
their daily demand for goods and services e.g buying food
stuff, payment of transport fair etc.
The level or amount of money help depends the amount of
money received and the interval at payment.
Business establishment also hold money in cash in order
to meet their day to day payment requirement such as
maintenance, fuel etc. which involve small amount of money.

2. SPECULATIVE MATIVES: People or firms hold money in

order to take advantage of investment opportunities with
high interest rate.
Most consumers will postpone some of their purchase if
they anticipate a fall in the prices of certain items in future.
On the other hand, they will increase purchase if they feel
that there will be increase in price in the nearest future.
 For example, people will hold more money/ cash if they
expect fall in prices of securities or goods and services and
hold fees if the prices of securities or goods and services is
going to rise.
 Precautionary Motives: this is when people hold/demand for
money in order to meet up with unforeseen circumstances
or unexpected expenditure such as sickness unexpected
visitors, accident etc.
 Firms also hold money/cash for unforeseen circumstances
or demand from various department.

SUPPLY OF MONEY
Supply of money: this is the total amount of money available for
the use in the economy of a given period of time. They include the
total value of bank deposit both current account and fixed deposit
account of commercial banks with the total amount of cash in bank
notes and coins circulating outside the banking system.
The supply of money is determined by the
 Amount of money put into circulation by central bank
 Credit policy of banks and
 People desire to hold currency and deposit.
FACTORS AFFECTING THE SUPPLY OF MONEY:
 Bank note
 Cash Reserve
 Economic situation/demand for excess reserve
THE QUANTITY THEORY OF MONEY
 Professor Irving Fishing is a leading quantity theorists. The
theory states thatv an increase in the quantity of money in
circulation will bring about a proportional rise in the price of
goods and services.
 He re-modified the quantity theory of money into VELOCITY
OF CIRCULATION OF MONEY which means the speed at
which money circulates within the economy by changing
from one hand to another.
1. The theory tries to explain the effects an imbalance between
the demand for and the supply of money. If there is excess
supply of money, the surplus would be spent by household
 and firms on currently produced goods and services.
But if the demand for money is higher than the supply they
would reduce their expenditure in goods and service and
their reduce their price level.
2. The theory also explains the relationship between the price
level: the supply of money, is also determined by variable of;
i. the rate which money circulated
ii. The output of goods and services other than the price
level.
3. The theory attribute the cause of change on aggregate
demand for currently produced goods and services to the
effects of equilibrium between the demand for and the
supply of money.
Therefore prices could rise without any change in the
quantity of money. If a S price occurs in the velocity of
circulation. On the other hand, prices may remain unchanged
even through there has been a corresponding increase in the
output of goods and services.
4. It also explain that increase in price are not as a result of
profit earning on the part of producer or seller.

In it crude form, the relationship is expressed as;

MV = PT where
M= money supply (the stock of money)
V= velocity of circulation of money
P = price level
T = Quantity of goods and services for exchange of money
MV= the money paid by consumers to producers
PT= the value of goods and services exchange or obtained for
money.
Using the concept by Fishor he explained that money
circulate from hand to hand.
 ILLUSTRATION: John the farmer spent N500 to buy Ice
cream.
The ice cream boy spent this to pay for taxi fare to the
market. The taxi driver spent some N500 on launch in a
nearby restaurant while the restaurant attendant spent the
N500 to buy vegetable from the farmer (John).
 Farmer

Restaurant launch Ice cream (boy)

Taxi driver
The N500 has returned to where it was before the transaction took
place. In the case, the same currency (N500) has been used for
different transaction. That is to say N500 demand for work of
N900 in the course of a year, each unit of money is used many
times.
 Therefore, velocity of money is the rate at which the stock of
money is turning over per year to consumer income
transaction. If the stock of money is turning over very slowly
so that the rate of currency (Naira) spending per year is low
then “V” will be low but if people spend as quickly as they
earned the “V” will be high.
THE VALUE OF MONEY
The value of money is the quantity of goods and services a given
sum of money can buy.
That is the purchasing power of money. If a given sum of money
can purchase more goods and services, it means that the value of
money has increase and vice –versa.
For example, if it cost 70k to buy 3 tubers of yam and 20k to buy 3
mudu of beans. How to buy a tuber of yam is N300. We can say the
value of money has decrease or fall.
FACTORS THAT INFLUENCE/DETERMINE THE VALUE OF
MONEY
1. Price Level: the value of money is inversely related to the
price level.
The higher the price level, the smaller/lower the quantity of
goods and services that a given sum of money can buy hence
the lower value of money – inflation.
On the other hand, the lower the general price level, the
greater the quantity of goods and services money can buy
and the value of money – Deflation.
2. Supply of money and it speed: an increase in the supply of
money without a corresponding increase in the supply of
commodity reduce the value of money while, a decrease in
 money supply increase it value.
3. The quantity of available goods and services - increase in
supply of commodity increase the value of money while a
decrease in supply would reduce the value of money.
FACTORS AFFECTING GENERAL PRICE LEVEL
1. The Supply of Money: An increase in money supply increases
the price level.
2. The quantity of goods and services available: Larger quantity
of goods without an increases in money supply reduces price
level.
3. Market demand and market supply: An increase in market
demand relative to supply increase the price level and vice-
versa.