Fall 2018 (First Semester 2018-2019 Academic Year)

Principles of Macroeconomics

Group Assignment consisting not more than three students. You may also submit it
individually. Due Date: 11 October 2018 by 5 PM
Course Instructor: Dr. Abu Reza Mohammad Islam
40 Marks

Note: Read the following case scenario and answer the questions in the end. Make your
suggestions and answers logically with proper justifications. Do not use the details without
references (avoid copy paste). Also use cover page with your group members names, ID
numbers, course name, code and instructor’s name with University Logo; use 12 Times New
Roman and maintain Space 1.5.

World Poverty Clock: Nigeria becomes poorest country

according to data

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According to the World Poverty Clock, Nigeria’s struggle with overpopulation will be a problem
now, rather than in 2050. Nigeria will by February 2018 overtakes India as the country with the
most people in extreme poverty. Currently, 82 million Nigerians live in extreme poverty, which
is 42.4 percent of Nigeria’s population. Living in extreme poverty as defined by the World
Bank is living under $1.90 per day. People living in extreme poverty are unable to meet their
minimal needs for survival. The first goal of the Sustainable Development Goals, set by the UN
in 2015 is to “eradicate extreme poverty for all people everywhere by 2030”. To achieve that
globally, by putting it into numbers, 90 people need to leave poverty every minute to eradicate
poverty totally by 2030.

However, there is a shortage of about 9.5 million people globally per year. Presently, The World
Poverty Clock, which monitors live estimates of global extreme poverty predicts that for the
2030 SDG target to be met in Africa, 57 people have to leave extreme poverty every minute.
However, that is not the case, as on the average, 9 people rather than leaving, enter extreme
poverty every minute. Nigeria and the Democratic Republic of Congo are both responsible for
the 9. Nigeria needs 11.9 people per minute to escape extreme poverty, but presently has a deficit
of 6.8 people every minute, i.e. 6.8 people enter into poverty every minute.

For Nigeria, its problem is its population. Nigeria’s population is growing faster than its
economy. Between 1990 and 2013, Nigeria’s population increased by 81 percent. By 2050,
going by the speed of its present population growth rate, Nigeria will be the third most populous

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country in the world. By passing the 400 million mark, it will be taking over from the U.S.A. and
be only behind China and India. On the contrary, in recent times, Nigeria’s dwindling oil wealth
due to the global oil price reduction, with oil being the mainstay of its economy, meaning its oil-
dependent GDP would be affected too. The country’s economy was hit hard by the recent
recession in the country. IMF projects GDP to rise by only 0.8 percent in 2018, after the
recession since 2016 had slowed down the economy.

Nigeria’s mean household income per capita is $1168, as compared to India’s $1759. However,
this wouldn’t be an accurate measure of the welfare of the average Nigerian. What would be
accurate to measure the economic growth as compared to its growing population will be the
wealth distribution. More wealth is concentrated with the elites, despite the country’s oil wealth,
than among the people. Those who have access to this oil wealth through politics have been the
major recipients of the wealth. The high rate of unemployment,endemic corruption, the lack of
basic social amenities for millions of people, the difficulty in doing business and the millions
living in poverty are all consequences of the huge inequality in Nigeria.

Hence, Nigeria’s rising extreme poverty numbers is not unexpected. Instead, it is a direct result
of years of negligent and ineffective government policies. Its dependence on oil for years and an
inability to generate non-oil revenue has led it to this. Even now, Nigeria’s 2018 record budget is
running on a deficit and will be funded by much borrowing with government debts on the rise. It
would be extremely difficult for the country to meet that 1st goal of the SDGs, which all the
other goals are more or less dependent on.

According to projections, Nigeria has already overtaken India as the country with the largest
number of extreme poor in early 2018, and the Democratic Republic of the Congo could soon
take over the number 2 spot (Figure 1 below). At the end of May 2018, our trajectories suggest
that Nigeria had about 87 million people in extreme poverty, compared with India’s 73 million.
What is more, extreme poverty in Nigeria is growing by six people every minute, while poverty
in India continues to fall. In fact, by the end of 2018 in Africa as a whole, there will probably be
about 3.2 million more people living in extreme poverty than there are today. Already, Africans
account for about two-thirds of the world’s extreme poor. If current trends persist, they will

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account for nine-tenths by 2030. Fourteen out of 18 countries in the world—where the number of
extreme poor is rising—are in Africa.

Source: Authors’ estimates based on PovCal (World Bank), World Economic Outlook (IMF); World Population
Prospects (UN); Shared Socio-Economic Pathways (IIASA), World Income Inequality Database (UNU-WIDER);
Algorithm developed by World Data Lab

The shift in the centre of global poverty from Asia to Africa is no surprise to Andrew Shepherd,
director of the Chronic Poverty Advisory Network at the Overseas Development Institute, whose
group noted the trend several years ago. “Broadly speaking I would agree that there is a shift
from Asia to Africa, although it is probably slower than some people think.”

Shepherd added that the situation appears to be exacerbated in African countries by features less
visible in many Asian countries, including questions of poor governance, harsher effects of
climate change and conflict. “I think it is shifting to states that are conflict-affected and states
most affected by climate change – and there is quite a correlation between the two – and states
that have both poor policies and are significantly underfunded and in terms of aid. There is a
whole bunch of these states and a significant number are in Africa.”

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This notwithstanding, the fundamental dynamics of global extreme poverty reduction are clear.
Given a starting point of about 725 million people in extreme poverty at the beginning of 2016,
we needed to reduce poverty by 1.5 people every second to achieve the goal and yet we’ve been
moving at a pace of only 1.1 people per second. Given that we’ve fallen behind so much, the
new target rate has just increased to 1.6 people per second through 2030. At the same time,
because so many countries are falling behind, the actual pace of poverty reduction is starting to
slow down. Our projections show that by 2020, the pace could fall to 0.9 people per second, and
to 0.5 people per second by 2022. As we fall further behind the target pace, the task of ending
extreme poverty by 2030 is becoming inexorably harder because we are running out of time. We
should celebrate our achievements, but increasingly sound the alarm that not enough is being
done, especially in Africa.

Discussion Questions

Question 1: What are the main reasons why Nigerians living in extreme poverty? Justify. ( 7)
Question 2: Why GDP per capita wouldn’t be an accurate measure of the welfare of the
average Nigerian? Explain. (8)

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Question 3: Refer to Table 1. Assume that this economy produces only three goods Good X
Good Y, Good Z. You must show your calculation step by step. (6 x 2.5 = 15 marks)
Table 1
Production Prices
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Good X 60 65 75 $2.00 $2.20 $2.20
Good Y 110 115 125 $0.80 $1.00 $1.00
Good Z 135 140 145 $1.00 $1.20 $1.20

a. Calculate the value for this economy's nominal GDP in year 1.

b. Calculate the value for this economy's nominal GDP in year 2.
c. Calculate the value for this economy's nominal GDP in year 3.
d. Compare nominal GDPs of Year 1, Year 2 and Year 3 and comment.
e. Consider Year 1 as base year. Calculate Real GDP for year 1 and Year 2.
f. Calculate GDP deflator for Year 1 and Year 2. Make a comment based on GDP
deflator values for Year 1 and Year 2.

Question 4: Explain the various phases in business cycle (shown as in figure 1). In particular
what it means to be in terms of unemployment/employment, income, production and business
investment in plants, equipment, and business inventory investment when the economy passes
through each phase: (i) trough, (ii) expansion/recovery, (iii) peak and (iv) recession. Give
example for each phase. (4 x 2.5 = 10 marks)

Figure 1: Phases of business cycle.

References: http://venturesafrica.com/powering-street-lights-in-nigeria/
https://www.theguardian.com/global-development/2018/jul/16/oil-rich-nigeria-outstrips-india-
most-people-in-poverty
https://www.brookings.edu/blog/future-development/2018/06/19/the-start-of-a-new-poverty-
narrative/