1) What's the main benefit of Redenomination?

Ans: Redenomination reduces the burden of carrying large bags of paper-money around (we could say it reduces transaction costs).

2) Does redenomination have any real Economic effects, ie Can redenomination help Ghana's GDP to grow?

Ans: No. Because redenomination doesn't affect neither aggregate supply nor aggregate demand of an Economy. In Economics, any growth in the economy is as a result of an increase in demand or supply. For instance, if corporate tax-rates are set right, that stimulates innovation and consequently boost production or supply. If consumption taxes (ie VAT) are set right, people would buy more and demand would increase (I will add to this in subsequent answers).
If still not convinced that Redenomination has no positive ECONOMIC effects, think a second about this: "If re-denomination had any positive economic benefits, wouldn't we see countries re-calibrating their currencies rampantly just to increase the national pie?"

3)Why doesn't redenomination affect the production activities (aggregate supply) of an economy?

Ans: A country's ability to produce is determined by 3 main factors: Resources, Technology and Institutions. It's very easy why technology is a determinant of production. Institution includes political stability, and the provision of the right incentives to produce. For instance, tax-rates must not be too high to inhibit innovation and should not be too low to prevent government activity (like welfare programs, construction of roads, etc). In Africa, government activity unfortunately includes filling pockets of politicians.
It's easy to note that more resources imply more production. Also, the availability of a resource is correlated with its price. Thus instead of talking about availability we could safely talk about how prices of resources (labor and kapital) affect supply.
Producers respond to changes in relative prices but redenomination does not change the relative prices in the economy: The ratio of factor (inputs) prices as well as the ratio of input prices to the prices of final goods remains unchanged after redenomination.
Think about a farmer that uses workers and tractors to produce oranges. The farmers' production pattern would only change if, for instance, it becomes relatively cheaper to rent tractors than to hire workers after redenomination. In this particular example, the farmer would be able to substitute workers with more tractors (ie capitally intensify) and thus increase production of oranges.
It's very easy to note that, redenomination cause ALL prices in the economy to decrease by the same rate. Thus, price ratios are unchanged and thus producer behavior are also unchanged.

4) Why doesn't aggregate demand change?

Ans: Aggregate demand is the sum of consumption, investment, government spending, and Net Exports. Let's see why redenomination has no effect on each of these demand contributions. We start with the trivial to the most tricky:

Government spending is determined by the spending behaviour (often erratic) of politicians: Kuffour wakes up and decides to celebrate Ghana's 50th anniversary.

Investment is determined mostly by real interest rates. Other non-market factors that could affect investment are stability of the government, and other instititutional factors like tax-rates. It's really hard to argue how redenomination could affect investment in any significant manner.

Consumption would remain unchanged. It's easy to falsely reason that prices would seem lower (ie prices of cars would be in the tens of thousands) and thus people might buy more. However, wages and thus earnings also suffers this illusion. As a result, redenomination would not change the purchasing power of money and hence does not stimulate consumption in any significant manner. Simply put, people would not feel any wealthier after redenomination.

Net exports (Exports - Imports) would not change since redenomination does not affect the strength of a currency. Notice that, the strength of a currency a country determines the relative prices of goods produced in that country to goods produced in other countries and hence can affect the terms of trade (ie imports and exports). However, after redenomination, US would still pay the same amount of dollars for a bag of cocoa as she did before redenomination. Thus exports to US would not change. With a similar reason, we should see why import should not change neither.

5) Really, Redenomination doesn't make the Ghanaian currency stronger?

Ans: NOPE! The strength of a currency is determined by the market factors, ie demand and supply for the currency. Since the purchasing power of the currency remains unchanged after redenomination, we should not expect demand for GHC to change. Similarly, redenomination doesn't give the monetary authorities any justification to change the supply of money.

Redenomination of currency is nothing but a recalibration and a change of name of the currency. This by no means imply the appreciation or depreciation of the currency.
It's important that we don't mistake redenomination with appreciation of a currency. We would have an appreciation if we instead have 1 Cedi (AND NOT 1 GHC) = 1 dollar. The cedi and GHC, like identical twins, are separate currencies!!!

6) What is the optimal number of zeros to chop off? (this question was motivated by the forum "New Ghana Cedi"?

Ans: From an economic point of view, this is a normative question and hence would differ from individual to individual. (don't believe me? See the heated discussion in the above named forum). Personally, I think it doesn't matter. I expect people to adapt rapidly and expect no significant mistakes in their nominal calculations. People are really careful with money and this trait would reduce the incidence of mistakes. (I still find it a mystery that my grandma, who has never been to school, is able to quote the total price of 16 and 3/4 crates of coca-cola). However, chopping off 4 zeros could be motivated by accounting convenience.

7)So, if redenomination reduces transaction costs, would it increase the rate of transaction and hence increase GDP?

Ans: Possibly, but in no significant way. I don't think the burden of carrying large Ghana-Must-Go bags of paper money prevented people from partaking in transactions. There were fortunately other ways to carry money (wiring through banks, travellers checks, etc.). Hey, in the olden days, when people used gold for trade and there existed no wire transfer mechanisms, the market survived despite the ridiculous weightsof gold, right?

Why is it that i still don't understand?

Ans: I strongly recommend ECON 202 (principles of economics). If you haven't taken that class, consider it because economics ROCKS (Dont believe, ask Comrade r and Steve B (lol))!!!

Question 8 is to signify that i have no more questions to answer. This is in no way, however, a comprehensive set of questions about redenomination. If there is any question on this topic troubling you.

 SORCE:
   www.ghanaconscious.ghanathink.org

@ gettolove

That is a nice post, i think i have picked up some useful information from it

babaflaky:

@ gettolove

That is a nice post, i think i have picked up some useful information from it

It became neccesary to find out from a ghanian blog because they just concluded theirs, Although it was just a mere theoretical analysis but with some useful basic information about the plan.

@ post
i believe by asking specific questions, we will all have a good knowledge of how the new policy will impact our economy.

Redenomination does not reduce the need to carry large bags of money around. We could just have higher denominations like the 500 and 1000 naira notes. The higher denomination notes will be printed with greater security. If the 5 naira note is too expensive to produce, nothing stops us from having a 5 naira coin. It's not a big deal at all.

@seun

Your argument is always leaving me wondering about the way you reason.


if $1 = =N=127, $1,000 would amount to =N=127,000 (NOW)

same $1,000 would amount to =N=1,250 only (POST RE

From the above you would have saved the cost of going around with (127,000 - 1,250) =N=125,750

Thank GOD you are not the governor of CBN, we would have had a =N=200,000 notes just like MUGABE

There is no difference between going around with 127,000 old naira and going around with 1,270 new naira.
It is like saying that there is a difference between going around with $1,000 and 127,000 naira today. There's none!

@ALL

wotever u proclaimed u worth,never 4get to divide it by 100 oh.if u are billionaire,u are now demoted to millionaire oh Dangote& Jimoh Ibrahim ,etc are now Millionaires ,if u are Millionaire,ur new financial status is now change to thousand naira worth while d thousandnaires can only wine & dine wit Hundrednaires,hundrednaires wil bcome kobonaires,while my brothers and sisters dat are kobonaires wil bcome kobolessnaires .

9ja na wa oh.We don't know where to run go again oh.Dis wil definitely result into GROSS CONFUSION,COMMOTION & CHAOS because landlords no go gree,marketwomen,etc go fight u,if u pay them present cost of there wares now DIVIDED BY 100

If wot i said is nt true,just wait and see wot wil happen come Aug.2008 and beyond.

Never worry God dey