CHAPTER TWO
LITERATURE REVIEW
This chapter tries to read, identify
and evaluate previous studies on fiscal policy.
According to Author Smithies, fiscal
policy is “a policy under which the government uses its expenditure and revenue
programmes to produce desirable effects and avoid undesirable effects on the
national income, production and employment” .Otto Eckstein defines fiscal
policy as changes in taxes and expenditures which aim at short-run goals of
full employment and price-level stability” (Jhingan 1997:646). Iyoha (2007),
defines fiscal policy as the use of changes in government expenditure and taxes
to influence the level of GNP and other aggregate economic variables.
Byrne, and Stone (1992), defined
fiscal policy as the use of government spending and tax policies to stimulate
or contract macroeconomic activity.
Fiscal policy is the use of
government taxing and spending powers to effect the behaviour of the economy.
Fiscal policy refers to government action to change the total or composition of
these revenues and expenditures in order to manage growth of demand in the
economy. The objective is to keep a growing labour force and the country’s
stock of industrial plants and machinery employed at relatively high levels but
without generating inflation or having to rely on excessive foreign borrowing
to pay for imported goods.
The traditional view of fiscal
policy emphasized the direct impact of government revenue and spending on
aggregate demand. Although, it was recognized that some tax and expenditure
changes affect the economy more than others, the government budget balance was
used a rough indicators of the impact of the government on aggregate demand.
Initially, it was though that government surpluses were associated with
depressed economic activity and deficits with a high level of output and
employment. Eventually, as economic reality disproved these simplistic notions,
a more changes in the balance of government revenue and expenditures to changes
in aggregate demand.
The various definitions of fiscal
policy tend to one thing. Fiscal policy is the manipulation of government
spending and taxation which aim at achieving the macroeconomic goals like full
employment price stability, equilibrium balance of payment.
Taxation is a non-punitive but yet
compulsory levy by the government on properties and income of individuals and
corporations (Ugwuanyi, 2004:35). Perhan (1961) noted that taxation was also
used as a means of stimulating hard work and discouraging indolence. Taxation
therefore remains the only effect financial instrument for reducing private
consumption and investment and transferring resources to government for
economic development. O the other hand, public expenditure is the beginning and
end of the collection of revenue by the government (Ugwuanyi, 2004:15). Anyanwu
(1997) defined public service by the activities of the federal, State and local
government levels. As pointed out by “Public expenditure and aim of collection
of revenues and of our financial activities of the statement”. Government
expenditure can be seen as the absorption of resources by the public sector.
The public sector, broadly defined as that portion of the national economy in
which economic and non-economy activities are under the control and general
direction of the state (federal, state and local governments).
The major components of fiscal
policy are expenditure and taxation. Government expenditure includes all
capital and re-current expenditures. Taxation on the other hand is made up
direct and indirect taxes. Direct tax is a tax levied upon a person who, as far
as possible, shifts the burden ie impact and incidence to other people
(Ugwuanyi, 2004:39).
2.1 The
Instrument of the Fiscal Policy
To understand the influence of government on the
economy, it is usual to start by examining the budget (Iyoha, 2004:39). It
implies that the major instrument of fiscal policy is government budget. The
budget shows, inter alia, the receipts and expenditures of the government in,
say, a given year (Iyoha, 2004:130). Ugwuanyi (2004;23) opines that a budget is
a document which proposes revenues and expenditures on ‘items and purposes”
like salaries, equipment and travel as well as housing, health and education.
Budget is the estimates of government expenditure and revenue in a fiscal year
(usually a year).
Government spending as a
fiscal instrument serves useful roles in the process of controlling inflation, unemployment,
depression, balance of payment equilibrium and foreign exchange rate stability.
In the period of depression and unemployment, government spending causes
aggregate demand to rise and production and supply of goods and services follow
the same direction. As a result, the increases in the supply of goods and
services couple with a rise in the aggregate demand exalt a downward pressure
on unemployment and depression.
In the case of persistent
rise in price (inflation) and the depreciation in the value of money, it is
expected that reduction in government expenditures discourages aggregate demand
and inflation and falling in the value of exchange rate are controlled. It is
worth to note that these two tools may be adopted simultaneously in the
economy. A rise in the government expenditure has the same effects as a
reduction in the tax rates on aggregate demand. Similarly, the effects of a
reduction in the government expenditures are the same as increases in tax
rates.
The budget could be balance budget
deficit budget, or surplus budget depending on the target of the government.
The federal government operates a balanced budget when its tax-revenues and
outlays exceed revenues, and a budget surplus if tax revenues exceed outlays
(Byrne and Stone, 2007).
To assess the impact of government
on the economy, we usually start by finding out if there is a budget surplus or
budget deficit. A budget deficit is expansionary and an increase in budget
surplus is contractionary. Suppose the aim of government is counter-cyclical
fiscal policy. It implies that in a period of slack the government should run
(or increase) a budget deficit, that is, it should increase government
expenditure or reduce taxes or both. If demand is excessive, the government
should run (or increases) a budget surplus, that is, should lower government
spending or raise taxes or both.
2.2 Administration
of Taxation in Nigeria
The constitution of the Federal Republic of Nigeria
(1979) as amended in 1999 provides that the federal government shall have exclusive
legislative powers over such matters as: taxation of incomes, profit and
capital gains, value added tax, customs and excise duties, export duties, mines
and minerals and stamp duties.
There are three main bodies for
administration of tax in Nigeria, namely: joint tax Board (JTP), Federal Board
of Inland Revenue (FBIR), State Board (JTB) in Nigeria is charged with the
basic functions of administrating income tax under the Income Tax Management
Act of 1961 (ITMA) as amended up to date (Ugwuanyi, 2004:44). The powers and
duties of the board (JTB) as stipulated by the act are: to exercise the powers
and duties centered on it by the express Provision of the Income Tax Management
Act (ITMA). To exercise powers and duties conferred on it by the enactment of
the Federal government imposing tax on the income and profits of companies, to
advise the federal government on request in respect of computations etc.
The State Board of Internal Revenue
is concerned with the function of assessment of personal income tax of all
those residing in the state, collection and accounting for the personal income
tax of all those residing in the state,
collation and accounting for the personal income tax of individuals in the
state with the exception of the members of the police force, Armed forces and
the personnel of the external Affairs collection and accounting for taxes from
partnership business, collection and accounting for taxes on profits of
individuals made trade, business, profession or vocation. The Federal Board of
Inland Revenue (FBIR) headed by the Chairman of board who is also the director
of federal Inland Revenue Department, is charged with assessment, and
administration of company tax, tax on members of the armed forces, tax on
diplomas etc.
Some economists do not believe that
fiscal policy has any impact on the economy (Nigerian economy inclusive). One
group makes the extreme claim that any deterioration in the budget balance has
to be financed by government borrowing, and that this borrowing in turn
represents future taxes that rational consumers will take into account in the
same way as current taxes by curtailing their spending. This offsets fully any
impact of an expansionary fiscal policy on the economy. Another group points
out that the increase in government borrowing resulting from an expansionary
fiscal policy will compete with private borrowers for funds, driving interest rate
and the exchange rate up and making private investment and exports more costly.
Again, this offset some of the original expansionary impact of the policy (The
Canadian Encyclopedia).
Keynes (1936), Opines that fiscal
policy affects economic growth. He was the first to suggest that fiscal policy
would be the most effective tool for economic stabilization. He continued by
suggesting that government should adopt expansionary fiscal policy during
depression and contractionary fiscal policy during inflation period.
Halima (2007), carried out an
empirical investigation on the “Impact of Fiscal Policy on the Nigerian economy
covering the period 1970 to 2005 she regressed Gross Domestic product on total
government expenditure and Federally Retained Revenue using OLS technique. She
came out with the coefficient of correlation to be 0.170 and adjusted R-square
to be 0.030. The multiple suggests that there is a positive relationship
between the dependent variable (GDP) the explanatory variables (expenditure and
retained revenue). The adjusted R2 of -0.030 suggests that 3 percent
of the total change in Gross Domestic product in Nigeria is attributed to
changes in the explanatory variables. Hence, the study implies that changes in
government expenditure and taxes have impact on Gross Domestic product.
Federal Reserve Bank of Dallas Study
covering the period of 1983-2002 discovered that an increase in the size of
federal government leads to slower economic growth. The study implies that
government expenditure and taxes are negatively related, that is, the higher
the size of government, slower the economic growth rate.
Jhingan (1997:660), says that fiscal
policy plays a dynamic role in development countries. He continued by noting
down the roles of fiscal policy as: increasing the rate of investment,
encouraging socially optimal investment, increasing employment opportunities,
promoting economic stability, contracting inflation and increasing and
redistributing national income.
A research from European commission
(EC) specifically explained that positive effects of fiscal balance are due to
smaller government. They reported that “Fiscal adjustments based on expenditure
cuts rather than tax increases have expansionary effects”, and an impact on
output of budgetary consolidation depends on whether it takes place on the
revenue or expenditure side. Thy continued by adding that tax increases are
likely to have a negative impact on output both in the short and medium run.
National Chamber Foundation study by
two George Washington University economists found: The empirical results based
upon three sets of international data consistently reveal a negative and
sadistically significant relationship between the scale of government and
economic activity. This finding according to them holds for all levels of
government as well as all types of government spending (Mitchell, 2005).
Organization for Economic
Co-operation and Development (OECD), admitted that taxes and government
expenditures affect growth both directly and indirectly through investment.
Ahmed (1986), found a negative
effect of the growth of government consumption as a fraction of GDP. They found
the co-efficient of correlation to be -0.032. The co-efficient of -032 is
highly significant, it implies that a one standard deviation increase in
government spending reduces average GDP growth by 0.32 percentage points.
Hence, government spending and economic growth are negative related.
Fatas and Mihov (2001), from the
London centre for economic policy research reports that “The effects of
government spending on economic activity derive from the fact that the
government absorbs resources and thus has a negative effect on the
representative’s agent’s wealth’. The implication of the study means that
government negatively affects economic growth. A Federal Reserve Bank of Dallas
study explained that in government spending leads to slower economic growth.
Blanchard and Perotti in “An
Empirical characterization of the Dynamic effect” found that both increases in
taxes and increases in government spending have a strong negative effect on
private investment spending. This effect is consistent with a neo-classical
mode with distortionary taxation, but more difficult to reconcile Keynesian
theory. Engen and Skinner (1992), in national Bureau of Economic research
(NBER) found empirically using data on growth rates over the period 1870 to
1984 suggest a significant and negative impact of government fiscal activity on
output growth rates in both the short-term and the long-term. An article from
the journal of money, credit in United States explained that “a permanent
increase in share of government reduces social welfare. When government
spending is financial with an income tax, permanent increase in spending
reduces the long-run growth rate. The same result applies when the spending
increase is financial only with wage income taxes. An article in the Quarterly
journal of Economics reported that the ratio of real government consumption
expenditure to real GDP had a negative association with growth and investment.
They continued that growth is inversely related to the share of government
consumption in GDP, but insignificantly related to the share of public
investment.
Grier and Tullock (1990), in journal
of political economy carried out empirical analysis on government spending and
economic growth. They covered 115 countries, using data on government
consumption and other variables. They found a significant negative relationship
between the growth of real GDP and the growth of the government share of GDP.
Landau (1983), studied 104 countries on a cross-sectional basis he found
significantly negative relations between the growth rate of real GDP per
capital and the level of government consumption expenditures as a ratio to GDP.
Barth and Bradley found a negative relation between the growth rate of real GDP
and the share of government consumption spending for 16 OFCD countries in the
period of 1971 to 1983.
Gwartney (1998), a member joint
economy committee in USA congress reports that there is clearly observable
negative relationship between size of government and long-term growth of real
GDP. He (Gartney) empirically investigated his assertion using least square
regression technique. The slope of the regression line was -0.1 (minus 0.1) indicates
that 10 percentage point increase in government expenditure as a share of GDP
leads to approximately a one percentage point reduction in economic growth. A
study from the Federal Reserve Bank of Dallas concluded that tax increases that
reduce the deficit are contractionary whereas spending cuts that accomplish the
same goal are expansionary. The study also noted that growth in government
stunts general economic growth. Increase in government spending or taxes lead
to persistent decreases in the rate of job growth. An European commission study
also reported that fiscal consolidations obtained through expenditure cuts may
increase short run investments, and a similar effect would be obtained by means
of reductions in government transfers.
Bartolini et al (1995), writing for
the centre for economic policy research, explains that those countries which
rely primarily on expenditure cuts are projected to enjoy output gains from
their adjustment over the long run, while those countries relying mainly on
labour and capital taxes are projected to suffer output losses. The study
implies that decrease in government expenditure favours long-term economic
growth, while increase in taxes (Income taxes) distorts long-run growth. Joint
economic committee also reports that through excessive spending, the government
negatively affects the long-run economic growth rate in free economy.
Government spending reduces labour form participation, increases unemployment,
and reduces productivity.
Guesh (1997), reported, “That growth
in government size is negatively associated with economic growth”.
Interestingly, the study also found that the negative effects of increase in
government size are greater in non-democratic socialist system than in
democratic market systems.
Alesina and Perotti (1994), members
national Bureau of Economic Research (NBER) in United States reported that an
increase in redistribution to the retires financed by an increase an the income
tax rate leads to an increase in the price of exportable goods, a decrease in
competitive, an increase in the relative price of nontaxable, provided the
elasticity of substitution between goods is sufficiently high, a decrease in
employment in both sectors. An increase in redistribution to the unemployed,
regardless of how financed, leads to same. Alesina et al (1999), find a sizable
negative effect of public spending-and in particular public wage component-on
business investment. The effects of government spending on investment are
larger than the effects of taxes. The study also stated that in organization
for economic co-operation and development (OECD) countries changes in fiscal
policy have important effects on private business investment. Interestingly,
the strongest effects arise from changes in primary government spending and,
especially, government wages.
Folster and Henrekson (2001), in
European economic review, empirically investigated the relationship between
government expenditure and economic growth. They reported that an increase in
the expenditure by ratio of 10 percent of government expenditure is associated
with an annual growth rate that is 0.7 percentages lower.
Engen and Skinner (2000), in fiscal
policy and economic growth, found that government spending rather than tax
rates have the greatest long-term negative impact on private sector
productivity, and that government spending and taxation both reduce the
productivity of labour and capital although the interacted taxation
co-efficient are not jointly significant at the 5 percent level. They
empirically justified their assertion by using a sample of 107 countries during
the period 1970 to 1985 they found a strong and negative effect in both
government spending and taxation on output growth. A balanced budget increase
in government spending and taxation of say 10 percentage points was predicated
to decrease long-term growth rates by 1.4 percentage points. Hence, the study
implies a negative relation between economic growth and expenditure, and
taxation.
Tanzi and Shuknecht (1997), Members
of International MonetaryFund (IMF) staff confirmed that average growth for
5-years period was higher in countries with small government in both periods.
The unemployment rate, the share of the shadow economy, and the number of
registered patents suggests that small government exhibit more regulator
efficiency and have less of a inhibiting effect on the functioning of labour
markets, participation in the formal economy, and the innovativeness of the
private sector. Hence, the study implies that growth in government expenditure
reduces economic growth.
However, many economists argued that
reduction in government expenditure leads to economic growth. They argued that
reducing the budget deficit is a way to economic growth. The theory works as
follows: a lower budget deficit leads to lower interest rates, lower interest
rates leads to increase in investment, more investment leads to higher
productivity, and higher productivity means more economic growth.
Analysis and appraisal of fiscal policy
development during the structural adjustment programme
The budget deficit as a percentage of GDP which stood
at 2.3% in 1985 increased to 10.6% in 1986 but plummeted to 5.5% in 1987. it
rose to 7.1% in 1988. The deficit/GDP ratio thereafter declined to 6.7% in 1986,
but rose further to 8.5% in1990, even though oil revenue rose sharply in that
year following the Gulf Crises. This contrasted with the 3.0% ratio target for
the programme. The deficit/GDP ratio increase significantly in 1991 and
recorded a peak level of 15.4% in 1993. it declined to 7.9% in 1994, while a
provisional surplus has been projected for 1995. Interest rate payment on
external and domestic debt obligations contributed significantly to the
domestic problem as it constituted well over 50% total expenditure outlay.
Federally collected revenue was derived mainly from petroleum receipt, customers
and excise taxes and company income taxes. Oil revenue came principally from
export sales, although a significant share was also derived from a domestic
sale. Three main factors were responsible for the increase in revenue during
1986 to 1990. These include the devaluation of currency as required IMF which
boosted the naira value of the oil export in 1986 and 1987. Another 50%
depreciation of the naira exchange rate reinforced by higher export prices
associated with the Gulf war in 1990 boosted revenue further. The increase in
revenue from custom and excise duties was attributed almost entirely to the
exchange movements, while the dependant revenue rose due to proceeds from the
privatization programme. On three occasion, the domestic petroleum product
prices were revised upward boosting oil revenue from domestic sales. The
federally retained revenue which accrued only to the federal government
increased persistently as its share in GDP increase from 10.9% in 1986 to 14.6%
in1990. Therefore, the ratio declined although, the absolute levels of retained
revenue were still moving upwards.
Total expenditure of federal
government as a percentage of GDP rose from 22.2% in 1986, remained at about
20.0% in 1987 through 1989 and went up to 23.5% in 1990. It averaged 18.7%
between 1991 and 1995. Primary expenditure that is, total expenditure less
interest payment on debt dropped from 22.2% of GDP in 1986 respectively. It
continued the decline up to 1992 before increasing to 14.7% in 1993. It was
estimated to decline in 1994 and 1995. On the other hand, the interest expenditure
rose from 4.1% of GDP in 1986 to 19.1% of GDP in 1990, as the federal
government assumed responsibility for the state and local government external
debt service obligation. Interest expenditure therefore absorbed over 40% of
the federal budget between 1989 and 1995.
The greatest change of fiscal
development to the monetary authorities was the financing of the federal
deficit while seeking to maintain monetary balance. Except in 1987, when there
was significant external inflow arising from rescheduling credit from the Paris
club, the bulk of the resources for financing the deficit came from the
domestic banking system, particularly the Central Bank of Nigeria (CBN). The
CBN financial on the average about 80 percent of annual fiscal deficit between
1991 and 1994.
2.3 Limitations
of Previous Studies
Many researchers had empirically
investigated the relations between economic growth and fiscal policy
(expenditures and taxes). They came up with various results that does totally
synchronize with the interest of the researcher.
Ndayako (2007), empirically
investigated that 3 percent variation in GDP (period 1970-2005) is caused by
variations in expenditure and taxes. The result is significant considering the
proportion of changes in GDP explained by the explanatory variables.
Many other researches shows that
budget deficit leads to economic growth. They opined that deficit budget leads
to low interest rates, low interest rates leads to high investment rate, high
investment rate leads to high productivity, and higher productivity means more
growth in the economy. The above assertion is over stated because not only
fiscal policy determines interest rate. Interest rate is determined by other
factors such as money supply and other factors.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
The variables considered in the estimated model are
Domestic Investment (dependent variable) and the independent variables; Company
Income Tax (CIT) and Value Added Tax (VAT). It covers the period of years
1994-2010.
4.1 PRESENTATION OF RESULTS
This research work employed the use of multiple
regression model based on Ordinary Least Square (OLS) method.
Modeling
LOG(INV) by OLS
LOG(INV) =
6.285 – 0.021 LOG(CIT) + 0.569 LOG(VAT)
T* = (6.486) (-0.714) (8.758)
S.E =
(0.969) (0.029) (0.065)
t0.025 =
2.145
F (2, 13) = 94.16
F0.05 =
3.74
R2 =
0.930802
DW =
1.62
4.2 ANALYSIS OF RESULTS
T-test: The calculated t-value for the regression coefficients of LOG(CIT)
and LOG(VAT) are -0.714 and 8.76 respectively. The tabulated t- value is 2.145.
Since the calculated t-value of LOG(CIT) is less than the tabulated t-value at
5% level of significance; we conclude that its regression coefficients is
statistically insignificant. However, the regression coefficient of LOG(VAT) is
statistically significant because its calculated t-value is greater than the
tabulated value.
Standard Error test: It is used to test for statistical reliability of
the coefficient estimates.
S(b1) = 0.03 S(b2) = 0.07
b11/2 =
-0.011 b21/2
= 0.285
Since
S(b1) > b1/2 , we conclude that the
coefficient estimate of S(b1) is not statistically significant while
the coefficient estimate of S(b2) is statistically significant.
F-Test: The F-calculated
value is 94.16 while the F-tabulated
value is 3.74 at 5% level of significance. Since the F-calculated value is greater than the F-tabulated value, we
conclude that the regression plane is statistical significant. This means that
the joint influence of the explanatory variables (CIT and VAT) on the dependent
variable (INV) is statistically significant.
Coefficient of Multiple Determination (R2) It is used to measure the proportion
of variations in the dependent variable which is accounted for or explained by
the explanatory variables. The computed coefficient of multiple determination
(R2 = 0.930802) shows that 93.08% of the
total variations in the dependent variable(INV) is accounted for, by the
variation in the explanatory variables namely Company Income Tax (CIT) and
Value Added Tax (VAT) while 6.92% of the total variation in the dependent
variable is attributable to the influence of
other factors not included in the regression model.
Durbin Watson statistics: The computed DW is 1.62. At 5% level of significance
with two explanatory variables and 17 observations, the tabulated DW for dL and
du are 1.015 and 1.536 respectively. The value of DW is greater than the upper
limit, therefore there is no evidence of positive first order serial
correlation.
4.3 TEST OF HYPOTHESIS
The
researcher wishes to evaluate the impact of taxation on foreign direct investment in Nigeria. With respect to this, the null and alternative
hypotheses are stated as follows;
Ho: Fiscal policy does not have significant impact on the
economy of Nigeria.
F-test is employed in testing the
hypothesis. This test will help to capture the joint influence of the
explanatory variables on the dependent variable.
Decision
Rule
If F-cal > F-tab, reject the null hypothesis and
conclude that the regression plane is statistically significant. Otherwise
accept the null hypothesis.
Using 5% level of significance at 2 and
14 degrees of freedom, the tabulated F- value is 3.74 while calculated F-value
is 94.2. Since the calculated F-value is greater than the tabulated F-value at
5% level of significance; we reject the null hypothesis and conclude that
fiscal policy has significant impact on the economy of Nigeria.
4.4 IMPLICATION OF THE STUDY
The regression result above shows
that fiscal policy has significant impact on the economy of Nigeria within the
period under study. It is estimated from the result that 1% increase in taxation
(CIT) will lead to decrease by 0.02% in INV. If tax rate on the company income
tax increases, domestic investment will
be discouraged. This seems to be true where the available firms in the
countries are taxed high and production are adversely affected thereby causing
a drop in the investment level of the country. However, it is estimated from
the result that 1% increase in VAT, will lead to increase by 0.6% in the
investment level of the economy.
CHAPTER FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary
of Findings
This research work evaluates the impact of fiscal
policy on the economy of Nigeria with respect to company income tax and
domestic investment. Fiscal policy was captured by Company Income Tax and Value
Added Tax (VAT). The statistical techniques employed, surfaced the following
results;
(i) Fiscal policy has significant impact on the economy of
Nigeria within the period under study; 1994-2010.
(ii) The entire regression plane is statistically
significant. This means that the joint influence of the explanatory variables
(CIT and VAT) on the dependent variable (INV) is statistically significant;
(iii) The computed coefficient of multiple determination (R2
= 0.930802) shows
that 93.08% of the total variations in the dependent variable (INV) is
accounted for, by the variation in the explanatory variables namely Company
Income Tax (CIT) and Value Added Tax (VAT).
(iv) The total variation of 6.92% of the total variation in
the dependent variable is attributable to the influence of other factors not
included in the regression model.
(v) There is no presence of
positive first-order serial correlation (autocorrelation) in the model.
5.2
CONCLUSION
Fiscal policy is one of the most important tool for economic growth in Nigeria. More so, taxation
which is another approach for fiscal policy is another factor which can promote
or discourage investment in a country. Thus, the fiscal policy is necessary in
the control of fluctuations experienced in the trade or business cycle. To
reduce inequalities through a policy of redistribution of income and wealth.
Higher rates of income taxes, capital transfer taxes and wealth taxes are some
means adopted for achieving these ends.
5.3 RECOMMENDATIONS
In the light of the
research findings, the following recommendations are presented;
·
Having seen that fiscal policy exert influence on investment,
investment should be promoted through tax reduction.
·
To ensure
increased investment within the economy, the Nigerian investment promotion
decree should be promulgated and repealed.
·
Government should
adopt tax policies that will not endanger the activities of investors in the
Nigeria.
·
There is every
need for government to protect local industries from foreign competition
through the use of import duties, turnover taxes/VAT and excises. This has the
effect of transferring a certain amount of demand from imported goods to
domestically produced goods.