ABSTRACT:
The research on welfare implication of determinants affecting
aggregate consumption expenditure was conducted by taking Rwanda as an area of
study, period 1995- 2015. The researcher's main purpose was to evaluate the
impact of gross domestic product, lending interest rate, inflation rate and
exchange rate on consumption expenditure in economy. To achieve the desired
objectives, the researcher analyzed how independent variables of the Gross
consumption expenditure (GDP, Lending Interest rate, Inflation rate and
Exchange Rate) work and how they affect the dependent variable (GCE). Augmented
Dickey-Fuller (ADF) and Phillips- Peron (PP) tests were used for stationarity
test. Engle- Granger two steps procedure and the Johansen Maximum Likelihood
Methodology were used to see whether variables are co-integrated or not. The
series analysis was done using Eviews 8 Software. Those tests revealed that
there is co-integration among variables. The researcher found that the economic
authorities in Rwanda use different tools of monetary policy and fiscal policy
in order to stabilize the economy, using determinants such as: money supply,
government spending, credit control, interest rates and other monetary and
fiscal measures can be manipulated by the economic authorities of Rwanda to
maintain welfare of the society.
Keywords:
Gross consumption expenditure(GCE), Inflation rate
measured by Consumer Price Indices(CPI), Exchange rate, Lending interest rate,
, Gross domestic product(GDP).
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LIST OF TABLES
Table 1: Status and trends of gross
consumption expenditure, Gross domestic product, Interest rate 29
Table 2: Stationarity at Level 39
Table 3: Stationarity at first difference
40
Table 4: Stationarity at second difference
41
Table 5: Long run Johansen Co-integration
test output 55
Table 6: Long run output effect of changes in
GDP, INT, INF, and EXCHR on Gross 56
Table 7: Short run relationship effect of
changes in GDP, INT, INF, and EXCHR on Gross 57
Table 8: Serial correlation tests 60
Table 9: Heteroscedasticity Test 60
Table 10: Ramsey reset Test 61
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LIST OF FIGURES
Figure 1: Inflation Keynesian View 23
Figure 2: Status and trends of gross
consumption expenditure, Gross domestic product, Interest rate 30
Figure 3: Jarque-bera Test output 59
Figure 4: Cusum test 62
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TABLE OF CONTENTS
APPROVAL iv
LIST OF TABLES x
LIST OF FIGURES xi
GENERAL INTRODUCTION 1
1.Background of the study 1
2.Significance of the study 2
3.Scope and period of the study 3
4.Problem statement 3
5.Hypothesis 5
6.Objectives of the study 6
6.1General objectives 6
6.2Specific objectives 6
7.Research methodology 6
7.1Techniques 6
7.1.a. Documentary technique 7
7.1.b. Interview technique 7
7.2 Methods 7
7.2.a. Statistical method 7
7.2.b. Analytical method 7
7.2.c Historical method 8
7.2.d Comparative method 8
7.2.e. Econometric method 8
8. Organization of the study 8
CHAP I: REVIEW OF LITERATURE 9
INTRODUCTION 9
Definition of the key concepts 9
1.1 Welfare: 9
1.1.a. The Genesis of the Welfare State 9
1.2 Consumption 10
1.2. a. Autonomous consumption 11
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1.2. b. Marginal propensity to consume 11
1.2. c Disposable income 12
1.3 National income 13
1.3.a. Definitions of National Income: 13
1.3.b Concepts of National Income: 16
1.4 Interest rate 19
1.4. a. Nominal Interest Rate 19
1.4.b Real Interest Rate 20
1.4. c Effective interest rate 20
1.5. Inflation rate 20
1.5.1. Causes of inflation 21
1.5.1.a. The cost push-inflation (On the supply side) 21
1.5.1. b Demand-Pull Inflation (On the demand side) 22
1.5.2 Keynesian inflation theory 23
1.6. Exchange rates 24
1.6. a. Nominal exchange rate (e) 24
1.6.b. Real exchange rate (å) 24
CHAPTER 2 ANALYSIS OF THE STATUS AND TRENDS OF
DETERMINANTS 27
INTRODUCTION 27
2.1. Evolution of gross consumption expenditure in Rwanda
1995-2015 27
CHAPTER 3 ECONOMETRIC ANALYSIS OF THE RELATIONSHIP OF
35
INTRODUCTION 35
3.1 Model specification 35
3.1.1 Hypothesis of the model 36
3.1.2. Expected signs 37
3.1.3 Test and analysis of the data 37
3.2. Data processing 37
3.2.1. Unit root tests 37
3.2.1.a. Why testing stationarity? 37
3.2.1.b. Interpretation of stationarity test 53
3.3 Estimation of long run model 53
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3.3.1 Co-integration test 53
3.3.2 Interpretation of Johansen Co-integration test output
55
3.3.3 Long run output 56
3.4 DIAGNOSTIC TESTS 58
3.4.1 Jarque-bera test (Normality test) 59
3.4.2 Breusch-Godfrey test (Serial correlation LM test)
60
3.4.3 Heteroscedasticity Test (Breusch Pagan Godfrey) 60
3.5 STABILITY TESTS 61
3.5.1 Ramsey reset test 61
3.5.2 Recursive estimates (OLS only): Cusum test 61
CONCLUSION ..64
SUGGESTIONS 64
REFERENCES ..66
APPENDICES 68
APPENDICES I 69
APPENDICES II 71
1
GENERAL INTRODUCTION 1.Background of the
study
In Rwandan economy as other economic systems of different
countries, among several key macroeconomic variables that determine aggregate
output, aggregate consumption appears to be an output determining variable that
has attracted a lot of attentions and studies. As one of the fundamental
components of gross national product (GNP) & gross domestic product (GDP)
and a major variable for measuring economic growth, consumption expenditure and
the nature of the consumption function have engaged much of the macroeconomic
debate dating back to John Stuart Mills and the classical economists of the
18th & 19th centuries, J.M. Keynes, Milton Friedman,
Franco Modigliani, James Duesenberry, Simon Kuznet etc. in the early to
mid-19th century.
This is so because consumption expenditure accounts for about
2/3of aggregate expenditure in virtually all economies. Consumption
according to (Blanchard O. 2003) is the act of using goods and services for the
purpose of satisfying man's innumerable needs. This encompasses the importance
of consumption in welfare. The aggregate consumption expenditure level which
includes expenditure on durable and nondurable goods shows the general position
of an economy. Neoclassical economists generally consider consumption to be the
final purpose of economic activity and thus, the level of consumption per
person is viewed as a central measure of an economic productive success. The
study of consumption behavior plays a central role in both macroeconomics and
microeconomics. Macroeconomists are interested in aggregate consumption for two
reasons. First aggregate consumption determines aggregate saving because
aggregate saving defined as the portion of income not consumed, flows through
the financial system to create the national supply of capital.
It follows that the aggregate consumption and saving behavior
have a powerful influence on economy's long term productive capacity. Second,
since consumption expenditure accounts for most of national output,
understanding the dynamic of aggregate consumption expenditure is essential to
understanding macroeconomic fluctuation and the business cycle. Microeconomists
have studied consumption behavior for many reasons such as using consumption
data to measure poverty, to examine the household's preparedness for retirement
or to test theories of competition in retail industries. A rich variety of
household level data sources in Rwanda allowed the researcher in this work to
examine household spending behavior, which has also been utilized to examine
interactions between
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consumption and other economic behaviors such as job seeking
or educational attainment in Rwanda. From the foregoing, it is important to
point out that both the government of Rwanda and household sectors of the
economy engage in consumption expenditure. The determinants of consumption
expenditure have been influenced by a number of other economic variables. To
study factors both quantitative and qualitative such as income, wealth,
interest rate, capital gain, liquid assets, etc. that can influence
consumption, as whatever influences consumption expenditure, plays a major role
in the process of economic growth in every economy and that of Rwanda as well.
Consumption decision and behavior is crucial for both short run and long run
analysis because of its role in determining aggregate output.
2.Significance of the study
The general interest of this study is to conduct a research
and the report can help understand the content of welfare implication of
determinants affecting aggregate consumption expenditure in Rwanda. It is very
important to understand household consumption and its determinants because
consumption and saving behavior have a powerful influence on economy's long
term productive capacity. It can help the society of Rwanda to know the effects
and the level of consumption expenditure so that they can manipulate it.
To the researcher
This study helped the researcher to be more acquaint with the
important role of income, interest rate, inflation rate as well as exchange
rate in influencing consumption decision. This can help also to know that as
increase in income encourages consumption as well as savings. As Rwandan who
has observed different problem in our society, a researcher has been interested
to undertake this work.
To Rwanda community
It can help the community to know how to behave in daily life;
therefore it helps to know how the income determines the level of consumption.
It helps educated people to take seat and introspect to which extent the level
of savings can really be in order to enhance the level of economic growth. This
study viewed as source of documentation to the future researchers and to
students taking similar field.
To ULK
This study also served to the Kigali Independent University
economic Students when they will be choosing their topics to prepare their
dissertations in coming days. The realization of this work complies
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with the academic requirement by which any student completing
the provided undergraduate program of course has to conduct a research, compile
and present a dissertation in order to be awarded a bachelor's degree.
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