Exchange Rate Fluctuation

CHAPTER TWO
2.0 LITERATURE REVIEW
For the purpose of achieving the objective of this study, it is pertinent to review previous work on this subject that will provide us with adequate conceptual, theoretical and empirical background for accessing the relevance and contribution of this study. The study tries to examine the relationship or linkage that exists between exchange rate fluctuation and employment paying attention to the manufacturing sector using analytical and econometric research tools.
2.1 CONCEPTUAL REVIEW
2.1.1 Exchange rate
Exchange rate as a term refers to rate of exchange of one nation’s currency to another. According to Sloman and Wride (2009), it is the rate at which one currency trades for another on the foreign exchange

Nigeria has adopted various exchange rate regimes since the post independence era. The system operated by Nigeria before 1973 put naira on par with a dollar, it was a fixed exchange rate system which was in harmony with the Bretton Woods pegged system and subsequently after the collapse of the system Nigeria later in 1986 adopted a deregulated system by allowing naira to find its way in the currency market - the floating exchange rate
2.1.4 Importance of exchange rate
Exchange rate remains a very important variable for the attainment of macroeconomic objectives. This is because it has effect on macroeconomic variables. It facilitates international transactions and hence, has implications on other price variables and the general price level. The important role it plays makes governments to take active interest in it. In summary therefore, the importance of exchange rate to an economy according to Obadan (2006) is that:
i. The exchange rate has an important role of connecting the price system of different countries, thus it enables traders to compare prices

Because the LM* curve is vertical, the trade restriction raises the exchange rate but does not affect income.
The economic forces behind this transition are similar to the case of expansionary fiscal policy. Because net exports are a component of GDP, the rightward shift in the net-exports schedule, other things equal, puts upward pressure on income Y; an increase in Y, in turn, increases money demand and puts upward pressure on the interest rate r. Foreign capital quickly responds by flowing into the domestic economy, pushing the interest rate back to the world interest rate r* and causing the domestic currency to appreciate in value. Finally, the appreciation of the currency makes domestic goods more expensive relative to foreign goods, which decreases net exports NX and returns income Y to its initial level.
Trade restriction does not affect trade balance because it does not affect income, consumption, investment, or government purchases. Although the shift in the net-exports schedule tends to raise NX, the increase in the exchange rate reduces NX by the same amount. The overall effect is simply less trade. The domestic economy imports less than it did before the trade restriction, but it exports less as