We accept

Impact of Fiscal Deficit on Capacity Utilization


Section THREE


This chapter handles the many methods, techniques and musical instruments used in the conduct of this research work. In addition it also contains the model specification and the many resources of data employed.


The financial model used in this job work intends to make the construction of analyzing the result of fiscal deficit on capacity usage and how they have an effect on the creation sector in Nigeria. Following the work of Abimbola, (2008), who made use of four variables, of which he used Gross domestic Product (GDP) as the reliant variable, Capacity usage, index of developing productivity, index of energy usage as the 3rd party variables. In addition, for this work, some factors were added, using Manufacturing outcome as the based mostly adjustable while fiscal deficit, capacity usage and government expenditure are the impartial variable, to be able to form the basis of this work.

Hence, the model is given below:

The linear equation is specified as


Specifying the equation in an ECM Function

MOPt = О0 + О1MOPt-1 +О2FDt-1 + О3CUt-1 +О4GEXPt-1 + О5ECMt-1 + Ut



MOP = Manufacturing Output

FD = Fiscal Deficit

CU = Capital Utilization

GEXP = Federal Expenditure

ECM = Error Correction Model

О0 = Intercept

О1 = Parameter Estimation of Fiscal Deficit

О2 = Parameter Estimate of Capital Utilization

О3 = Parameter Estimation of Administration Expenditure

U = Stochastic Error Term

3. 2 Explanation of Variables

Manufacturing Output

Manufacturing activities have significant effect on the economy of an nation. It developed economies, for case, they account for a substantial percentage of total economical activities. In Nigeria, the sub- sector is in charge of about 10% of total GDP annually. In conditions of employment era, manufacturing activities take into account about 12 per cent of the labour make in the formal sector of the nation's economy. This is why manufacturing information are relevant indices of the financial performance of any nation.

There are two basic tasks of the federal government in any culture; maintaining legislations and order (i. e. making and enforcing) as well as providing general public goods such as good highways, education, health, protection, power etc. Over time, scholars have argued that increase in government expenses on socio-economic and physical infrastructure fosters monetary growth. For example, expenditure on education and health boosts the level of national output through better quality of labour and efficiency. Similarly, spending on infrastructure such as streets, communications, power etc reduce creation costs and increase success of firms, thus fostering financial growth.

Fiscal Deficits

Fiscal deficit could be witnessing from many sides. It's the gap between your government's total spending and the sum of its revenue receipts and non-debts capital receipts, (Buhari 1994). It symbolizes the quantity of borrowed funds required by the government to totally meet its expenses. It might also be thought as the excess of total expenses including loans online of obligations over income receipts and non-debt capital receipts. In addition, it indicates the total borrowing of the government, and the increment to its exceptional debt. Despite the fact that realized revenues are often above budgeted quotes, extra budgetary expenditures have been growing so fast and lead to fiscal deficit, Anyanwu (1997), and Robini (1991), demonstrates budget deficit in developing countries are seriously influenced by the degree of politics instability as well as public finance considerations with no apparent direct aftereffect of elections.

Capacity Utilization

A metric used to gauge the rate at which potential productivity levels are being met or used. Shown as a share, capacity utilization levels give understanding in to the overall slack that is throughout the market or a company at confirmed time. When a company is working at a 70% capacity usage rate, they have room to increase production up to a 100% utilization rate without incurring the expensive costs of creating a new flower or center. Capacity utilization rates may also be used to look for the level of which device costs will increase.

Government Expenditures

Government Expenses orgovernment shelling out for goods and servicesincludes all authorities intake and investment but excludes copy payments created by a state. Federal acquisition of goods and services for current use to directly satisfy individual or collective needs of the participants of the city is classed as government final ingestion expenditure. Federal acquisition of goods and services designed to create future benefits, such as infrastructure investment or research spending, is classed as federal investment (government gross fixed capital formation). Administration outlays that are not acquisition of goods and services, and instead represent exchanges of money, such as public security repayments, are called transfer payments and are not included in the particular countrywide income accounts make reference to as government expenditure. The two types of authorities spending, on final usage and on gross capital creation, mutually constitute one of the major components of gross home product.

John Maynard Keynes was main economists to advocate government deficit spending within the fiscal insurance plan reaction to an economic contraction. In Keynesian economics , increased authorities spending is considered to increase aggregate demand and increase consumption, which brings about increased production. Keynesian economists argue that the Great Depression was concluded by federal spending programs including the New Package and armed service spending during World Battle II. According to the Keynesian view, a severe recession or depression may never end if the federal government does not intervene. Classical economists, on the other side, believe increased federal spending exacerbates an financial contraction by shifting resources from the private sector, which they consider successful, to the public sector, that they consider unproductive.

Government spending can be financed byseignior age group, taxes, or authorities borrowing.

3. 3 A prior Expectation

Fiscal Deficit

This is an optimistic romance between Fiscal deficit and the making output, which is shown by the higher the bigger the fiscal deficit, the higher the investment towards making sector that may translate into an increased increase in developing output. This relationship is shown below as:


Capacity Utilization

From the model above, theoretically a good marriage is expected between capacity utilization and manufacturing sector productivity and gross local product.

Capacity utilizationis the extent to which an enterprise or a country actually uses its installed successful capacity. It is the relationship between real end result that is actually produced with the installed equipment, and the output that could be produced with it, if capacity was totally used. If market demand develops, capacity utilization will rise. Therefore if fiscal deficit boosts government expenditure, it also improves demand leading also to increased capacity usage in other to meet with the increased demand which leads to a positive romance between capacity usage and developing sector output. That is shown below:


Government expenditure

A positive romantic relationship exists between federal expenditure that could also be seen as government spending and developing sector end result.

In expanding countries aspiring development, government will increase its expenses in other to increase per capita income of the individuals to be able to reinforce their demand features.

This increased per capita income could therefore be channeled by the people either into two directions which could be increased usage or savings.

When income is based on increased consumption, this in turn increases the demand of goods from firm which pressures them to increase their level in other to meet the increased demand, this therefore triggers a manufacturing result increase, within the facet of increased savings, it would lead into increased investment and also increased manufacturing output. Therefore, a confident relationship is present between government costs and manufacturing outcome. This is shown below as:


3. 4 Technique of Analysis

This work uses the co-integration analyses as well as the error modification model (ECM)

Co-integration test has been a useful tool used in tackling some monetary evaluation problem, which includes

  • Testing rationality of expectation
  • Testing market efficiency in various market
  • Testing for long term income hypothesis
  • Testing for purchasing electricity parity.

The co-integration test is utilized in creating a way out to an inefficient and non sense or spurious final result that is obtained by the ordinary least square (OLS) which could take place by regressing a non stationary series on another non fixed series which might be inconsistent (Engle and Yoo, 1987).

3. 4. 1 Periods IN CO-INTEGRATION

A co-integration analysis technique consists of various tests which includes the unit root test, the co-integration test and the error modification model.

Unit Root Test

The unit main test is recognized as the most important factor in undertaking or testing for the stationary of a time series data.

Unit main test is a pre-test; it works together with co-integration, it is utilized to determine the type of co-integration test to be used, and in essence it deals with the determination of the order in which a variable is integrated for the intended purpose of further examination.

For instance, a period series Yt is said to be integrated of order 1 or I (1) of Yt is a fixed time series. A fixed time series is reported to be I (0). A arbitrary walk is a particular case of I (1) series, because if Yt is a arbitrary walk, Yt is a random series or "White noise". White noises is a particular case of the stationary series. A stationary time series Yt is reported to be integrated or order 2 or is I (2) if Yt is I (1) and so on.

Test for Co-integration

A co-integration model can be used to carry out lab tests of possible linear combo among economic factors. The idea of co-integration among parameters is related with the fact that though economic variables might not exactly be stationary when tested individually against the based mostly changing but a system could remain that prevents some of the varying from diverging significantly from one another. Co-integration can therefore take place in several non fixed time series, if there is around a linear combination of stationary factors. . Which means that the combo of variables will not possess long linear romantic relationship or does not carry stochastic movements. The hypothesis of co-integration among the variables is declined if the critical value is accepted and validate the choice hypothesis if normally. The various possible linear combinations among the variables is said to be "co integrating formula" which indicates an extended run equilibrium romantic relationship.


The very well known approach to co-integration among variables and to make a decision the amount of co-integration test formula is known as Johansen's co-integration test. The results obtained out of this test is utilized in obtaining information on the amount of co-integration formula (ranking) over time among the variables between one and five percent critical prices. If which means result carried out from the co-integration test implies that a long run dynamic romance among the parameters is available, then we move to talk about a parsimonious error modification model, which symbolizes a brief run dynamic model, and when otherwise, the necessity for error correction will not arise.

Advantages of Co-integration Test

  • It establishes the long term relationship between economical parameters that are stationary.
  • It makes us understand if there is a linear combo among the variables

Error Correction Model (ECM)

The Johansen co-integration test taken is out if you want to test and attain the life of the long run linear romance that exists among economic parameters. This test therefore helps a person following a research to learn whether to check out one correcting modeling or weather not to. If therefore factors are co-integrated, there will be a need for short run dynamic modeling (ECM) in case not, the utilization of error modification model will not be useful.

"Yet another way of detailing co-integration and error modification modeling is that it is an expansion and generalization of the original approach to modeling brief run disequilibrium through partial adjustment model", Abimbola (2008). The error modification model, which includes the previous cycles disequilibrium, in the ultimate formula can however be observed as a straight forward generalization of the partial adjustment model.

Abimbola (2008), however stated that the use of techniques of both co-integration and error correction provides more riches, versatility and flexibility to the econometrics modeling of strong systems and the integration of short run powerful with long run equilibrium.

This error correction modeling (ECM) can be divided in two types, that are:

  • The parsimonious error modification model, and
  • The over-parameterized model


This study employed secondary data accumulated from CBN statistical Bulletin, World Loan provider, Country wide Bureau of figures and IMF


More than 7 000 students trust us to do their work
90% of customers place more than 5 orders with us
Special price $5 /page
Check the price
for your assignment