MATHEMATICAL APPROACH TO CURRENCY DEVALUATION AND EXCHANGE RATE

Exchange rate is the rate at which countries exchange their currency or the rate at which a country decides to buy or sell her currency in relation to other currencies of the world.

Example 1

Assuming that Nigeria is willing to buy or sell cocoa at N400.00 per ton and the U.S.A. is willing to buy or sell at $50.00, then the value of the two currencies can be fixed as:

N400.00 = $50.00

N8.00 = $1.00

The exchange rate is therefore $ 1.00 to N8.00.

Example 2

- Let us assume that the initial exchange rate of the Nigerian naira and the US dollar is N1.00 = $5.00
- A Nigeria importer is to purchase 60 computer systems at a cost of $40.00 each from the USA.

Total amount required to purchase the computer system = (60 x $40.00 ) = $2,40.00

- Since the exchange rate is N1.00 = $5.00, total amount of naira required:

$2,40.00 = $2.40.00

5

= N480.00

This means that a Nigerian Importer would spendN480.00 to import the 60 computer systems to Nigeria.

- If Nigeria devalues her currency by 100%, the new exchange rate would be N2.00 = $5.00 or N1.00 = S2.50.
- The amount of money the Nigerian importer will have to spend will now be

$2,400.00 = #2.400.00

2.5

= N960.00

N960.00 would be required to import the same 60 computer systems.

Example 3

In year A, 80 naira exchanged for a dollar and later in year B, 130 naira exchanged for a dollar through the forces of demand and supply.

- State the effect of the above on the value of the dollar.
- How much, in naira, would be needed to purchase N50,000 dollar worth of a generator for the US A in year A?
- How much, in naira, would be needed for the same purpose in year B?
- (i) Calculate the percentage change in the value of the naira between year A and B.
- From your calculation, state the effect on the value of the naira.

Solution

- The value of the dollar appreciated.
- In year A,

N80 x $50,000 = N4,000,000.00

# 4,000,000.00 would be needed.

N130 x $50,000 =

N6,500,000.00

N6,500,000.00 would be needed.

(d)(i) percentage change in the value of the Naira

= N130 – N80

N80 x 100

= 50 x 100

80 1

ii. The value of naira has depreciated.

161. LIVER FLUKE

162. ECTO PARASITES

163. TICK

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