Munich Personal RePEc Archive

Thirlwall Law: Validity of the Law in Nigeria

Adesete, Ahmed and Osinloye, Adelanfe and Abolade, Modupeoluwa and Nwachukwu, Christian and Onyejeaka, Emmanuel and Ojo, Dolapo and Ogungbemi, Tosin and Phillips, Martins (2018): Thirlwall Law: Validity of the Law in Nigeria. Published in: International Journal of Scientific and Engineering Research , Vol. 9, No. 4 (April 2018): pp. 899-903.

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Abstract

The thirlwall law is also called the balance of payment constraints model. The basic model is anchored on the dynamic Harrod foreign trade multiplier, which is also known as Thirlwall law or the 45 degree rule, developed through the pioneer efforts of Thirlwall (1979). On the assumption of constant relative prices and absence of capital flows, the basic dynamic Harrod foreign trade multiplier postulates that the rate of growth of a country can be predicted by considering the ratio of the rate of growth of a country's exports volume to its income elasticity of demand for imports (that is growth rate of exports volume divided by income elasticity of demand for imports can be used as a basis for predicting a country's growth rate). Thereby this law concludes that the growth rate of a country is balance of payment constrained. The broad objective of this study is to test for validity of Thirlwall law on the Nigeria economy that is to check if this law is applicable to the economy of Nigeria as a whole . The specific objectives of the study are:

- to check if there is long run balance of payment equilibrium.

- to examine if Nigeria economic growth is balance of payment constrained.

- To determine elasticity of import and export of Nigeria.

This law has been tested in several countries including developed and developing countries of the world but very few study has been done on it in Nigeria. Therefore, this study seeks to test if the Thirlwall law is relevant to Nigeria economy. This study also aims to fill the knowledge gap in that:

- is Nigeria balance of payment constrained ?

- is there a long run balance of payment equilibrium in Nigeria ?

- what is the elasticity of import and export of Nigeria ?

This study employs a recently developed autoregressive distributed lag (ARDL) cointegration procedure by Pesaran and Shin (1999) and Pesaran et al to estimate the import function. The Wald test statistic and graphical plotting of the actual growth rate and predicted growth rate is used as the test for thirlwall hypothesis. Augmented dickey fuller test is used to test for stationarity of the series and variables are differenced in a case of non-stationarity of the series.

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