Analysis of factors affecting inflation rate in Rwanda (1990-2009)

2.1.3 Gross Domestic Product

Gross domestic product (GDP) is the sum of the market values of all final goods and services produced in a country (that is, domestically) during a specific period using that country's resources, regardless of the ownership of the resources (Richard 2004:11).

In other words, GDP refers to the market value of the flow of final goods and services within the domestic territory of the country during the period of one year, inclusive of the consumption of fixed capital. Using the product approach, it is estimated as the sum total value added by all the producing units within the domestic territory of the country. In terms of income approach, it is estimated as the sum total of compensation of employees, operating surplus, mixed incomes of the self employed, net indirect taxes and consumption of fixed capital. And, in terms of expenditure approach, it is the sum total of private consumption, government consumption, gross domestic capital formation and net exports. (Jain and Khanna 2007: 95).

Gross domestic product comprises Gross domestic product at factor cost and at market price. In the words of Hanson, «The Gross domestic product at factor cost is the sum of net value added by all the producers in the domestic territory of the country and the consumption of fixed capital in an accounting year». In contrary, according to the Dernburg «Gross domestic product at market price is defined as the market value of the output of final goods and services produces in the domestic territory of a county during an accounting year».

2.1.4 Interest rate

According to the encyclopedia dictionary, an interest rate is the price a borrower pays for the use of money they borrow from another borrowee, for instance a small company might borrow capital from a bank to buy new assets for their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are fundamental to a Capitalist society. Interest rates are normally expressed as a percentage rate over the period of one Gregorian year.

The interest rate changes when money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.

The interest rate comprises the nominal and the real interest rate, the nominal interest rate refers to the amount, in money terms, of interest payable as opposed to the real interest rate which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account.

2.1.5 Money Supply

Money supply or money stock is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits.

Moreover, Economists define money as anything that is generally accepted in payment for goods and services or in repayment of debts. Currency, consisting with notes and coins is one of type of money. Define money as currency is to narrow because checks are also accepted as payment for purchases, checking account deposits are considered as money. Other deposits such as savings deposits can in effect function as money if they can be quick and easily converted into currency or checking account deposits.

There are different measures of money:

1. The narrowest measure of money (M1) in Rwanda includes the currency in circulation out the banking sector (CC) and checking account deposit (CD) in other words, narrow money measures cover highly liquid forms of money (Money as means of exchange).

2. The broad monetary aggregate (M2) in Rwanda adds to M1 savings deposits in Rwf and in foreign currency. It includes the less liquid forms (Money as a store of value).