ESTIMATION OF TRADE ELASTICITIES IN NIGERIA: A TEST OF MARSHALL–LERNER CONDITION (1981–2010).

Abstract

This paper attempted testing whether the Marshall-Lerner condition (MLC) holds for Nigeria’s bilateral trade with West African monetary zone countries. The two stage Least squares (2SLS) was adopted on annual time series data from 1981-2010. An econometric technique of co integration was used to establish the long-run behavior of the variables. The Augmented Dickey Fuller (ADF) test statistics was also applied to test for unit root. The result obtained shows that there is a long-run relationship between import, export, the dependent variables and exchange rate, the independent variables. The empirical result from the 2SLS shows that Sierra-Leone and The Gambia satisfied the M-L condition while Ghana did not. The research therefore recommends for a policy mix that will strengthen domestic and foreign income in external sector management. While devaluation of the naira be done with respect to countries that meet the M-L condition. This further suggests that income particularly those that did not meet the M-L Condition in order to improve trade balance. This is because increase in foreign countries income can also lead to improvement in Nigeria’s trade balance by increase in imports from Nigeria, provided imports exhibit an inelastic demand.