THE EFFECT OF INFLATION ON INCOME MEASUREMENT AND THE EFFECT ON LOW INCOME EARNERS

CHAPTER ONE

INTRODUCTION

The tendency of price to rise, and of the value of money to fall is known as inflation. One of the main objectives of any responsible government is to control the rate of inflation because of its undesirable effect on the economy. In most developed countries, the economic specter of the inter-war period was the demoralizing level of unemployment. The worry of unemployment has given way to a concern over inflation. Most economic policy may be seen as a continued fight to sustain increase and the distortions created by them.

One of the most important objectives of both individual and corporate firm is the generation of sufficient income to meet inflation. In the foregoing contact, values placed on reputed income will be examined with reference to inflation is a global pheromone which may be defined as continuous increase in prices.

When there is too much money in circulation, people easily get much money to spend let us imagine a primitive economy producing food as its only commodity and we will assure that the money supply in such economy consists of N10 (Ten Naira) notes, each of which can be used only ones.

In year one 10,000 units of food are sold at N10, each and consumed if in year two the same amount of food is produced but the supply of money is increased to N20,000 then people with access extra money will be prepared to offer more for each unit and prices will definitely rise towards N20 each.

If on the other hand, the supply of food has increased by 100 percent as well as we would expect prices to have stabilized.

The relationship is far more complex than this suggests, but the supply of income is an important factor to be considered in the question of inflation.

This has been thought to have been, when financial accountants do while presenting a financial report.

The way in which government defines money supply wary to some extant from one country to another.

In Nigeria, for example, it is defined as the sum of or the amount of currency in circulation and the amount of money held “ on demand’ by the banks.

The Nigerian money supply expanded rapidly during the inflation of the late 1970s as a result of the rapid increase in demand relatively to supply an expansion that was financed by the country’s new and endowed oil wealth.

Oil was then accounting for more than 90% of the revenue accruing to Nigerian Government.

Ever since then the rate of inflation has been on the increase that income is no longer worthy of anything.

In view of these, the statement of Accounting standard practice the (current cost Accounting) was issued by the accounting standard committee. Hence, this research is aimed at considering the effects of inflation on income measurement and effects on low-income earners.

For the first twenty-five years after the war, successive governments manage to keep the rate of unemployment at less than 3% by maintaining a high level of aggregate demand.

This however resulted in the periodic balance of payment crises as income were absorbed by high incomes and exports became difficult to sell though rising prices. With fixed exchange rate under the Breton Woods aggregate, any strain on balance of payment result in a fall in the gold and foreign currency reserves. Thus, the “stop go policy developed”.

According to most financial theories expected inflation should be the basic underlying influence in asset pricing since it might affect the expected cash flows and the discount rate. In most authoritative and copperhead unanticipated inflation as well as changes in expectation as explanatory variables.

Stock market returns signaled changes in the inflationary process because of the following chain of macro economic events.

Firstly the government principal revenues are corporate taxes. When stock prices increase or decrease in response to anticipated changes in economic conditions, personal and corporate incomes move in the same direction.

Including a similar changes in government revenue are closely related to stock market movements.

Secondly if government expenditures do not accommodate themselves to changes in revenue, fluctuations in revenue will be reflected in deficits.

Thirdly, when a deficit occurs, the treasury is obliged to borrow. And could repay the debt during later surplus periods provided the direct ten revenue increased or expenditure decreases enough to generate such a surplus.

Instead, the typical modus operandi has been to have the Federal Reserve System in any affected country to “Monetize” the debt by printing currency or expanding bank reserves. This effectively generates the required surplus by indirect taxation though inflation caused by an increased rate of monetary growth. In other words, a change in returns predict a change in government revenues, fluctuating revenue leads to periodic government deficit and increase in government debt. The larger debt causes an increase in expected future indirect tax liabilities both personal and corporate, because of debt magnetization and its consequence inflation.

Income is distributed arbitrarily. Not only does inflation reduce the standard of living of people dependents on fixed income for example pensioner, but it benefit debtors and penalizes (unless the loan is inflation –proofed”). Thus, the stability upon which lending and borrowing depends is undermined.

The difficulty in measuring changes in the general level of prices (that is, in the value of money) is that, different kinds of prices-wholesale prices, retail prices, security prices, import prices, etc. change differently. If we try to measure changes in all prices, therefore our task would be stupendous. But, more than that, it would lack practical significance suppose, for instance that remaining unchanged. A measurement of the general level of prices would show a rise, but this would be of little interest to the manual worker who owns no securities.

When measuring changes in the value of money, therefore, it is usual to concentrate on the changes in the prices of those goods which are of most general significance – the goods bought by the majority of people, for it is upon the prices of these that the cost of living nearly depend.

1.2 STATEMENT OF RESEARCH PROBLEM

A problem which most manufacturing and services concerns encounter is one of which to decide on how to incorporate inflation into planned unit cost, so that cost of production as disclosed in the respective financial statement takes cognizance of red cost rather than absolute cost. There is also the problem of low to feature inflation when valuing both fixed and fictions assets and also the provision for depreciation on these assets.

1.3 OBJECTIVES AND PURPOSE OF STUDY

The purpose, aims and objective of this research study is to critically examine the following areas:

1. The various purpose of measuring income of individuals.

2. The nature and concept of income

3. Nature, types, concepts and application of inflation.

4. Inflation in relation to income.

5. Effects of inflation on low income earners.

6. Recommendations that would be useful to students, college authorities, government and Amy interested parsons towards the minimization of inflation on income.

1.4 RESEARCH QUESTION AND HYPOTHESIS

The question in which this research study attempts to answer in the course of research are:

i Does Inflation affect income measuring?

ii Is it difficult to finance investment projects under inflationary conditions?

Hypotheses is an assumption which can be tested about a population. The following hypotheses have been selected.

i Inflation does not make inter-period comparison difficult

ii There are problems in allocating cost and revenue to specific time periods.

iii Profit on disposal of fixed assets are not regarded as point of income.

iv Inflation does not affect dividends proposal or paid to shareholders.

1.5 HISTORICAL BACKGROUND

The recent experience in Nigeria and some West African Countries suffering devaluation of their domestic currency, have proven conclusively that the government expenditure and development planning could be affected by inflation.

A review of monetary allocation in the development plans in Nigeria could illustrate these facts.

In the years (1962-1968) development plan total was N2.36 Billion was allocated and spent. In the years (1970-1974) development plan was a total of N3.1 Billion, which was allocated and spent. This was normal. But, in the year (1975-1980) development plan of N30 Billion was allocated, but was later increased to N42 Billion. Thus, the expenditure was increased from N30 Billion to N42 Billion. Thus was unprecedented and inflationary.

In the years (1980-1985) development plan of N82 Billion was planned for expenditure. From 1985 to 1988 the amount budgeted hardly last 6 months.

These methods of allocation and expenditure, which were not matched with real productivity and employment generation, were enough to cause inflation in the country.

It was recalled that “Petrol-Naira” realized between 1988 and 2001 brought about uneconomic and corrupt spending on the part of the government and inflation reached a high level. Ever since a number of economic reforming methods were put forward and actually used by companies in an attempt to give more meaningful information’s to users of published accounts.

Based on the aforementioned, it is obvious without any base that the Nigerian leadership is too primitive and extremely corrupt considering the inflationary trend counter pants in the advanced economic states like the U.S.A, the U.K., Egypt, South-Africa, Tunisia, etc.

1.6 SCOPE AND LIMITATIONS OF STUDY

This project researches on how individuals operating in Lagos measure their income inrelation to the Time Value of money. It further examines the application and effects of statement of accounting standard practice 16 (Cost Accounting) and its subsequent suspension by accounting standard committee on the income as measured by the individual.

The research will further look into the objectives of the work, aimed at providing empirical evidence on the monthly inflationary expectation in Nigeria between the periods of 1991 to 1995. The study will be able to determine whether the expected inflation rates are independent or there is a positive or negative inflation. Also effect of inflation on low-income earners and effect on income measurement will be determined. Changes in consumer index will be used to measure inflation rate. This is because in Nigeria, though there is no free market for short-term interest rate. In most cases, the rate are set and heavily controlled by the government and also while interest rate ignores sprains seasonality in inflation rate unlike the consumer price index, the variability of monthly inflation rate is very large because if index construction, i.e. frequent sampling of some items inducing a strong seasoned pattern.

1.7 DATA COLLECTION PROCEDURE

The necessary data as regarded the research will be obtained through the following:

1. Questionnaire

2. Direct Interviews

3. Secondary Source

1.8 DEFINITION OF TERMS

INFLATION: the rise prices and ways caused by an increase in the money supply and demand for goods and resulting in a fall in the value of money. The problem posed by unemployment has given way to a concern over inflation. Most economic policy which are vibrant may be seen as a constant fight to sustain prices increase and the distortions created by them.

INCOME: this is general defined as money received over a certain period usually as payment for work done or as interest on investment. As a result of the employment of factors of production during a year a country achieves a certain output of goods and services, its total volume of production for that year. For them services to production factors, labour in particular, is general paid for its service in money, this payment being variously known as wages.

POLICY: this is government regulations laid down for a purpose. The policy of an economic vibrant country is meant to have a positive effect on the overall lives of its subjects. These enhance the details of the country’s balance of payments, the national income and summaries of production of the basic sectors. Coal. Iron and steel, textiles, agriculture, banking. The distribution of labor among different industries, investment in various industries and personal expenditure on consumers goods.

BUDGET: It is a financial statement of government proposed earning and expenditure for the next financial year. In each case the previous year’s estimate and outturn are shown in some countries, for example sureden, two separate budgets are presented, one covering current and the other capital expenditure.

EARN: Amount or payment entitled to an individual or organization after rendering some services. As a result of employment of the factors of production during a particular year a county achieves a certain output of goods and services, its total volume of production for that year. For their services to production factors are generally paid for their services in money, these payments being generally known as earn.