Memoire Online - Welfare implication of determinants affecting aggregate consumption expenditures in Rwanda

A research thesis submitted in the partial fulfillment of the requirements of the award of bachelor's degree in economics

I, NIZEYIMANA Alphonse hereby declare that this dissertation entitled «Welfare implication of determinants affecting aggregate consumption expenditure in Rwanda: 1995-2015» is my own work and it has not been submitted anywhere for the award of any degree.

This is to certify that this dissertation work entitled «Welfare implication of determinants affecting aggregate consumption expenditure in Rwanda 1995-2015» is original research conducted by Mr. NIZEYIMANA Alphonse under my supervision and Guidance as a University full lecturer.

Full Professor and Dean of the School of Economics and Business Studies at Kigali Independent University (ULK)

I would like first to acknowledge and thank God for loving and blessing me since my birth until now.

I thank particularly Prof. Dr. RUFUS Jeyakumar who devoted part of his time to the supervision of this work. His invaluable guidance contributed to the successful completion of this research.

I would like to expand my thanks to my beloved HABIMANA Canisius's whole family.

I would like to expand my thanks to brothers and best friends: Mr. NSABIMANA Amiable, Mr. HATEGEKIMANA Jean Baptiste, M^r. HAREMIMANA Joseph, M^r. NGIRIMANA Benjamin and their families who more contributed to the achievement of this work.

Thanks go to my beloved family M^me NYIRAMBARUSHIMANA Alexandrine and my first bone BUSINGYE Thea Isabelle who all encouraged me during my studies. Thanks go to my friends, colleagues and classmates precisely in the department of economics for making my student life enjoyable.

X-M: Export minus Import

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.

Gross consumption expenditure(GCE), Inflation rate measured by Consumer Price Indices(CPI), Exchange rate, Lending interest rate, , Gross domestic product(GDP).

Table 1: Status and trends of gross consumption expenditure, Gross domestic product, Interest rate 29

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

Figure 2: Status and trends of gross consumption expenditure, Gross domestic product, Interest rate 30

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 18^th & 19^th centuries, J.M. Keynes, Milton Friedman, Franco Modigliani, James Duesenberry, Simon Kuznet etc. in the early to mid-19^th 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

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.

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.

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.

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

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.

3.Scope and period of the study

This study is addressing on assessment on welfare implication of determinants affecting aggregate consumption expenditure in Rwanda. We normally assessed the level of aggregate consumption as a function of income, interest rate, inflation rate and exchange rate as well such the Rwanda, after 1994 Genocide, the economy was really in recessionary period so that it was not easy for the community to produce and consume. The research dated from 15^st March 2016 and ended on 15^th August, 2016 and then presented on September 06^th, 2016.

4.Problem statement

Rwandan economy is struggling for balance of payment deficit because of high level of imports and lower level of export, the Rwanda currency which is depreciating day to day, a continuous increase of prices as well as the high level of lending interest rate. The level of income is normally lower because of lower level of return of wages and many other factors. This study, therefore, aims at finding out the trends of key macroeconomic variables that determine aggregate consumption expenditure in Rwanda from 1995 to 2015. The theory underpinning this study stems from the nature and relationship between consumption and income. The most undeniable attention to what has come to be called the consumption function was first well thought out by John Maynard Keynes. In less developed counties (LDC) like Rwanda, consumption expenditures are based on actual income, not full employment or equilibrium income, important savings and investment determinants include income, expectations, and other influence beyond the interest rate. These assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated have their greatest short run impact on real output and employment, not on price. Rationalizing rigid prices is hard to do because according to standard microeconomics theory, real supplies and demands do not change if all nominal prices rise or fall proportionally. If government spending increases, for example, all other components of spending remain constant, then output will increase. Therefore, J.M Keynes's absolute income hypothesis didn't give account. Milton Friedman emphasized that consumers smooth their expenditure by borrowing and

lending. He posited that consumption is determined by long term expected income rather than current level of income. He argued that consumption in one day is determined not by income received on that day but on the average daily income received for a period. Income consist of a permanent (anticipated and planned) component and a transitory (windfall gain/unexpected) component (Anyanwu, 1993). Milton Friedman noted that permanent income or expected long average income is earned from both human and non-human wealth consisting of labor income, saved money, debentures, equity shares, and real estate and consumer durables goods like cars, refrigerators, air conditioner, TV sets etc. This theory made an important contribution by laying stress on changes in interest rate and wealth as well as the desire to add to one's wealth (Forgha, 2008). Many economists have posited that consumption depends on a person's lifetime income. Franco Modigliani emphasized that income varies systematically over people's lives and savings allow consumers to move income from the time in life when income is high to low income lifetime period in order to smoothen consumption. The life cycle hypothesis is based on household utility maximizing behavior defined on present and future consumption subject to a lifetime resources constraint. It assumes that price is constant, interest rate is stable and consumers do not inherit any asset and as such the wealth owned by a consumer are his own. It also indicates that consumption in a period depends on the total resources (wealth) one has to spend over his remaining lifetime which composes of initial wealth and expected earnings at late stage in life^. (Onuchuku, 1998).

Keynes in his book «The General Theory of Employment, Interest rate and Money» published in 1936 laid the foundation of modern consumption theories. Keynes mentioned several subjective and objective factors which determine the consumption of a society. However, of all factors, he posited that the level of income determines the consumption of an individual and the society. He laid stress on the absolute income of an individual as the major determinant of consumption and as such, his theory was regarded as the absolute income hypothesis. His theory centered on the relationship between the Marginal Propensity to Consume (MPC) and Average Propensity to Consume (APC).

Further, Keynes put forth the fundamental «psychological law of consumption» according to which he propounded that as income increases, consumption increases, though not by as much as the increase in income. In other words, the marginal propensity to consume is less than 1, means that 0<MPC<1.

Keynes made 3 salient points from his proposition. First, consumption expenditure depends mainly on absolute income of the current period. Second, consumption is a positive function of absolute level of current income and third, the more income derived, the more the consumption expenditure in that period (Jhingan, 2002).

Keynes posited that interest rate does not have an important role in influencing consumption decision. This stood in stark contrast to the classical economist who believed that a higher interest rate encourages savings and discourages consumption (Blare, 1978). Based on conjectures, Keynesian consumption function is given as C= C0 + bY^d, a>0, where C is the consumption, Y^d is disposable income; C0 is consumption when income is zero (autonomous consumption) and b is the rate of change of consumption due to change in income called the marginal propensity to consume (MPC). While this theory has success modeling consumption in the short run, attempt to apply this model over a long time frame proved less successful. This led to the emergence of other consumption theories put forth by several economists based on other key factors which is believed to determine consumption other than income. From all the reason above the researcher has to conduct this study basing on the following two questions:

? What is the status and trends of gross consumption expenditure, income, interest rate, inflation rate and exchange rate from 1995 up to 2015 in Rwanda?

? Is there any relationship between consumption, income, interest rate, inflation rate and exchange rate from 1995-2015 in Rwanda?

5.Hypothesis

In order to respond to the above mentioned questions in this statement of the problem, same hypothesis were indicated to guide the researcher for positive or negative conclusion that can be explained like anticipation or opinion regarding the result of the study. Another fact is prediction regarding the possible outcomes from the study in term of the variable that hypothesis is tentative proposition which is subject verification through subsequent investigation (CRAWITZ, 2001-198). So the provisionary answers from the above mentioned questions are the following:

? Trends positions of gross consumption expenditure that is relative to its associates to which it belongs in Rwanda are upward sloping.

? There is a long run relationship between gross consumption expenditure and its associates in Rwanda.

6.Objectives of the study

This research aims at general and specific objectives and, which give a sense to the general objective 6.1General objectives

The general objective of this study is to verify the impact of income, interest rate, inflation rate and exchange rate on gross consumption expenditure in Rwanda.

6.2Specific objectives

? To identify the relationship between explained and explanatory variables of the above

Research methodology is the general approach which will be used while conducting the present study. This research methodology refers systematically to solve the research problem above mentioned. It can be also defined as analysis of principles of methods rules and postulates employed by a discipline, and the systematic study of methods that are the main intention of the research to find out how change can be implemented effectively within an organization and to suggest some solutions to correct wrong issues (KHOTAR, 2004)

7.1Techniques

In research, techniques are the way used to collect data from the field. There are many ways of collecting data such as sample size, questionnaire, documentary, interview and so on. During this work, techniques that helped the researcher are the following:

7.1.a. Documentary technique

This technique is used to collect information from written sources related to the topic like: Books, Journals, Brochures, Internet, Reports, archives and so on.

7.1.b. Interview technique

This technique use face to face or telephone by asking prepared questions to persons from the targeted institutions or groups. These questions are related to the research that is being undertaken.

7.2 Methods

The method is a set of intellectual operations which enable to analyze, to understand and to explain the analyzed reality or to structure the research. To conduct this research, the following methods used:

7.2.a. Statistical method

Statistical method is the application of statistical and mathematical methods in the field of economics to analyze and describe the numerical relationship between key economic variables (KHOTAR, 2005). The results of analysis are tables and figures estimated by a method of ordinary least squares (OLS), from the parameters of the model that we have identified.

7.2.b. Analytical method

The analytical method is a generic process combining the power of the Scientific Method with the use of

This method have been used to analyze the data collected, other information applied to the research and to understanding theoretical relationship between consumption, income, interest rate, inflation rate and exchange rate.

7.2.c Historical method

We have used data from recent years and have been able to interpret them based on historical evidences. Without history and research materials in the past, this work would not have been able to succeed.

7.2.d Comparative method

In this research, different ways already available to help in comparing data have been very helpful in analyzing the data in the period under study.

7.2.e. Econometric method

Econometrics method is the application of mathematics, statistics and computer science to economic data and is described as the branch of economic that aims to give empirical content to economic relations. This method has been used to compute some parameters with E-views software and have been used in testing the hypotheses in order to determine the level of significance. Econometrics is the application of mathematical and statistical methods to economic data and is described as the branch of economics that aims to give empirical content to economic relations.

8. Organization of the study

This study is composed of the introduction, three chapters and conclusion. General introduction includes a brief detail of the above mentioned point from the back ground to the selected methods to be used:

? The first chapter is the literature review of the key concept, this means all theories related to the topic of economics.

? The second chapter presents the analysis of evolution of trends of consumption, income, interest rate, inflation rate and the exchange rate.

? The third chapter focuses on the econometric analysis of the impact of income, interest rate, inflation rate and exchange rate on aggregate consumption expenditure in Rwanda. Finally, there is conclusion of the work and suggestions to policymakers.

The theoretical framework of this chapter is the theoretical literatures which explain in deep the different variables of the used model. The presentation of different researches which was conducted using the same variables showing the empirical evidences therefore the researcher focused on the summary of the gaps to fill in the study.

1.1 Welfare: In this research, a discussion on welfare occurred to know whether any allocation of resources is efficient or not. By efficiency in economics a researcher mean whether any state or situation regarding resource allocation maximizes social welfare. In welfare economics attempt is made to establish criteria or norms with which to judge or evaluate alternative economic states and policies from the viewpoint of efficiency or social welfare. These criteria or norms serve as a basis for recommending economic policies which will increase social welfare. Thus the norms established by welfare economics are supposed to guarantee the optimal allocation of economic resources of the society. Welfare in economics is defined as a branch of economics that studies how the distribution of income, resources and goods affects the economic well-being of the community. An example of welfare economics is the study of how certain health services help bridge the barrier between different classes of people.

According to Barr 2004, the Welfare State «defies precise definition». The main reasons are that welfare derives from other sources besides state activity and there are various modes of delivery of the services made available to citizens. Some are funded but not produced by the State, some publicly produced and delivered free of charge, some bought by the private sector, and some acquired by individuals with the money handed on to them by the State. Although its boundaries are not well defined, the Welfare State is used as «shorthand for the state's activities in four broad areas: cash benefits; health care; education and food, housing, and other welfare services» (Barr 2004:21). The objectives of the Welfare in economics can be grouped under four general headings. It should support living standards and reduce inequality, and in so doing it should avoid costs explosion and deter behavior conducive to moral hazard and adverse selection. All these objectives should be achieved minimizing administrative costs and the abuse of power by those in charge of running it.

Consumption is defined as the use of goods and services by consumer purchasing or in the production of goods. Personal consumption expenditures (PCE) are measures of price changes in consumer goods and services. Consumption refers to the expenditures of goods and services that give satisfaction in the present time. It is the use of resources to satisfy human needs. Gross consumption expenditure is the use of resources used to satisfy human needs at current price. Goods that human always use to satisfy their needs are therefore divided into subcategories.

Durable goods: These are products that are not quickly consumed and can be conserved along time. These are tangible goods that tend to last for more than a year. Common examples are cars, furniture, and appliances. Durable goods constitute about 10-15 percent of consumption expenditures.

Non-durable goods: These are products that are consumed immediately which mean they have a short lifespan. These are tangible goods that tend to last for less than a year. Common examples are clothing, food, and gasoline. Non-durable goods constitute about 25-30 percent of consumption expenditures. Services: A type of economic activity that is intangible not stored and does not result in ownership. A service is consumed at the point of sale. Services are one of the two key components of economics, the other being goods. These are intangible activities that provide direct satisfaction to consumers at the time of purchase. Common examples include health care, entertainment, and education. Services constitute about 55-60 percent of consumption expenditures.

This function is used to calculate the amount of total consumption in the economy. It is made up by autonomous that is not influenced by current income and induced consumption that is influenced by economy's level of income. In its most general form, the household's lifetime value function can be: consumption in `youth' while the second argument represents consumption in `old age'. Simply, this function can be written in variety of ways for example, it can be expressed as C=a+b(Y-T). Again, it can be expressed as C=C0+C1Y^d

Y^d: Disposable income (This is the income after Government taxes and transfer payment)

Autonomous consumption also known as exogenous consumption is defined as expenditures taking place when disposable income levels are at zero. This consumption is typically used to fund consumer necessities, but causes consumers to borrow money or withdraw from savings accounts. It is the consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income; generally, it may be required to fund necessities and debt obligations. In the above mentioned function, the autonomous consumption is shown by C0.

In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers); therefore it is the slope of consumption function. Because this metric is assumed to be positive, thus a positive relationship between consumption and income occurs and if income increases, the level of consumption increases too. However, Keynes mentioned that the increase of income and consumption is not equal. The Keynesian consumption function is also known as the absolute income hypothesis as it is only based on current income and ignores potential future income.

Criticisms of this consumption led to the development of Milton Friedman's permanent income hypothesis ad Franco Modigliani' lifecycle hypothesis. The marginal propensity to consume (MPC) cannot be calculated without disposable income. In the classic Keynesian framework, disposable income is the income left over after taxes and is divided between consumption and investment. Suppose that an individual receives an extra 2000 0 Frw and spends 18000Frw, saving the remaining 2000 Frw. His MPC is 0.9, or 18000/20000.

The effect is said to be marginal because it assumes new income being introduced to a previously static state. The marginal propensity to consume was presented in John Maynard Keynes' work "The General Theory of Employment, Interest, and Money." Keynes titled this work to evoke comparisons between his general theory of economics and Albert Einstein's theory of general relativity. Keynes believed his work was as seminal to mathematical economics as Einstein's was to mathematical physics. MPC was the starting point to Keynes' central mathematical arguments. Keynes noted that individual consumption is divided between consumption and investment. He expressed this argument as Y = C + I. He further

stipulated that any marginal increase in income would be divided between consumption and investment, or OY = OC + OI. Keynes then extrapolated from this that communities would have a general tendency to spend a fraction of its new income. He shows this with OC/OY, or marginal consumption divided by marginal income. The only thing left over from his formula, investment, would receive the rest. Later on in "The General Theory of Employment, Interest, and Money," Keynes manipulated the relationship between income, consumption and investment to justify his multiplier. Later Keynesians have argued that this multiplier effect is greater for poorer communities, since they have many goods and services to buy; their marginal propensity to consume is larger.

People can either spend or save their disposable income. When people are very poor, they cannot afford to save. All of their disposable income will be spent on buying basic necessities to survive. In fact, some may have to spend more of their income in order to be able to buy enough food and clothing and pay for housing.

When people spend more than their income, they are said to be dissaving. This is because they are either drawing on their past saving or more likely, borrowing other people's savings. As income rises people are able, to both spend and save more. As people become richer they buy more and better quality products. It is interesting to note, however, that whilst the total amount spent rises with income, the proportion spent tends to fall. For example: A top class footballer in Rwanda may earn a disposable income of 150,000 Frw a month whilst an unemployed person in Rwanda may live on benefits of 15,000 Frw a month.

The unemployed person may spend all of the 15000 Frw. The footballer can clearly afford to spend more and is likely to do so. However, even if he has a very luxurious lifestyle, it is unlikely that he will spend all of the 150,000 Frw. If he spends 100,000Frw (a huge amount) he will only be spending 80% of his disposable income, whilst the unemployed person is spending 100% of his income.

The proportion of income which people spend is sometimes referred to as the average propensity to consume (APC). It is calculated by dividing consumption by disposable income. As income rises, expenditure increases but the APC falls.

National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. Commonly, national income means the total value of goods and services produced annually in a country. In other words, the total amount of income accruing to a country from economic activities in a year's time is known as national income.

It includes payments made to all resources in the form of wages, interest, rent and profits. In this variable, we shall be giving the detail containing, definitions of national income, concepts of national income, methods of measuring, national income, difficulties or limitations in measuring national income, importance of, national income analysis as well as the inter-relationship among different concept of national Income.

The definitions of national income can be grouped into two classes: One, the traditional definitions advanced by Marshall, Pigou and Fisher; and two, modern definitions. According to Marshall «The agents of production: Land, labor and capital and organization a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.» In this definition, the word `net' refers to deductions from the gross national income in respect of depreciation and wearing out of machines. And to this, must be added income from abroad.

Though the definition advanced by Marshall is simple and comprehensive, yet it suffers from a number of limitations. First, in the present day world, so varied and numerous are the goods and services produced that it is very difficult to have a correct estimation of them. Consequently, the national income cannot be calculated correctly. Second, there always exists the fear of the mistake of double counting, and hence the national income cannot be correctly estimated. Double counting means that a particular commodity or service like raw material or labor, etc. might get included in the national income twice or more than twice.

For example, a peasant sells wheat worth .200,000 frw to a flour mill which sells wheat flour to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells it to the customers. If each time, this wheat or its flour is taken into consideration, it will work out to Rs.800, 000 Frw, whereas, in actuality, there is only an increase of .200, 000 Frw in the national income. Third, it is again not possible

to have a correct estimation of national income because many of the commodities produced are not marketed and the producer either keeps the production for self-consumption or exchanges it for other commodities.

Arthur Cecil Pigou in the field of Welfare economics has, in his definition of national income, included that income which can be measured in terms of money. In the words of Pigou, «National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money. This definition is better than the Marshallian definition. It has proved to be more practical also. While calculating the national income nowadays, estimates are prepared in accordance with the two criteria laid down in this definition. First, avoiding double counting, the goods and services which can be measured in money are included in national income. Second, income received on account of investment in foreign countries is included in national income. The Pigouvian definition is precise, simple and practical but it is not free from criticism. First, in the light of the definition put forth by Pigou, we have to unnecessarily differentiate between commodities which can and which cannot be exchanged for money.

Nevertheless, actually there is no difference in the fundamental forms of such commodities; no matter they can be exchanged for money. Second, according to this definition when only such commodities as can be exchanged for money are included in estimation of national income, the national income cannot be correctly measured. According to Pigou, a woman's services as a nurse would be included in national income but excluded when she worked in the home to look after her children because she did not receive any salary for it. Similarly, Pigou is of the view that if a man marries his lady secretary, the national income diminishes as he has no longer to pay for her services.

Thus the Pigovian definition gives rise to a number of paradoxes. Third, the definition is applicable only to the developed countries where goods and services are exchanged for money in the market. According to this definition, in the backward and underdeveloped countries of the world, where a major portion of the produce is simply bartered, correct estimate of national income will not be possible, because it will always work out less than the real level of income. Thus the definition advanced by Pigou has a limited scope.

Irving Fisher adopted `consumption' as the criterion of national income whereas Marshall and Pigou regarded it to be production. According to Fisher, «The National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from the human environments. Thus, a piano, or an overcoat made for me this year is not a part of this year's income, but an addition to the capital. Only the services rendered to me during this year by these things are income. Fisher's definition is considered to be better than that of Marshall or Pigou, because Fisher's definition provides an adequate concept of economic welfare which is dependent on consumption and consumption represents our standard of living. But from the practical point of view, this definition is less useful, because there are certain difficulties in measuring the goods and services in terms of money. First, it is more difficult to estimate the money value of net consumption than that of net production. In one country there are several individuals who consume a particular good and that too at different places and, therefore, it is very difficult to estimate their total consumption in terms of money. Second, certain consumption goods are durable and last for many years.

If we consider the example of piano or overcoat, as given by Fisher, only the services rendered for use during one year by them will be included in income. If an overcoat costs 20,000frw and lasts for ten years, Fisher will take into account only 20,000 frw as national income during one year, whereas Marshall and Pigou will include 20,000 frw in the national income for the year, when it is made. Besides, it cannot be said with certainty that the overcoat will last only for ten years. It may last longer or for a shorter period. Third, the durable goods generally keep changing hands leading to a change in their ownership and value too. It, therefore, becomes difficult to measure in money the service-value of these goods from the point of view of consumption.

From the modern point of view, Simon Kuznets has defined national income as «the net output of commodities and services flowing during the year from the country's productive system in the hands of the ultimate consumers. On the other hand, in one of the reports of United Nations, national income has been defined on the basis of the systems of estimating national income, as net national product, as addition to the shares of different factors, and as net national expenditure in a country in a year's time. In practice, while estimating national income, any of these three definitions may be adopted.

There are a number of concepts pertaining to national income and methods of measurement relating to them. Gross Domestic Product (GDP): J.M Keynes Defines GDP as the total value of goods and services produced within the country during a year. This is calculated at market prices and is known as GDP at market prices. The Governments always plans to spend during fiscal year therefore, a reduction in planned expenditure decreases the level of income (GDP). GDP at market price is «the market value of the output of final goods and services produced in the domestic territory of a country during an accounting year.» There are three different ways to measure GDP: Product method, Income method and Expenditure method, these three methods of calculating GDP yield the same result because:

Product Method: In this method, the value of all goods and services produced in different industries during the year is added up. This is also known as the value added method to GDP or GDP at factor cost by industry of origin.

The Income Method: The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.

Expenditure Method: This method focuses on goods and services produced within the country during one year. GDP by expenditure method includes:

Thus GDP by expenditure method at market prices = C+ I + G + (X - M), where (X-M) is net export which can be positive or negative. GDP at Factor Cost: It is the sum of net value added by all producers within the country. Since the net value added gets distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed capital consumption (or depreciation). Thus GDP at Factor Cost = Net value added + Depreciation.

NDP is the value of net output of the economy during the year. Some of the country's capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost-Depreciation.

When GDP is measured on the basis of current price, it is called GDP at current prices or nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP. Nominal GDP is the value of goods and services produced in a year and measured in terms of money at current (market) prices. In comparing one year with another, we are faced with the problem that is not a stable measure of purchasing power. GDP may rise a great deal in a year, not because the economy has been growing rapidly but because of rise in prices (or inflation). On the contrary, GDP may increase as a result of fall in prices in a year but actually it may be less as compared to the last year. In both 5 cases, GDP does not show the real state of the economy. To rectify the underestimation and overestimation of GDP, we need a measure that adjusts for rising and falling prices. This can be done by measuring GDP at constant prices which is called real GDP. To find out the real GDP, a base year is chosen when the general price level is normal, i.e., it is neither too high nor too low. The prices are set to 100 (or 1) in the base year.

Now the general price level of the year for which real GDP is to be calculated is related to the base year on the basis of the following formula which is called the deflator index.

GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100. Gross National Product (GNP): GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad. GNP includes four types of final goods and services:

Net National Product at market prices is the net value of final goods and services evaluated at market prices in the course of one year in a country. If we deduct depreciation from GNP at market prices, we get NNP at market prices. So NNP at Market Prices = GNP at Market Prices-Depreciation.

Net National Product at factor cost is the net output evaluated at factor prices. It includes income earned by factors of production through participation in the production process such as wages and salaries, rents, profits, etc. It is also called National Income. This measure differs from NNP at market prices in that indirect taxes are deducted and subsidies are added to NNP at market prices in order to arrive at NNP at factor cost. Thus NNP at Factor Cost = NNP at Market Prices-Indirect taxes+ Subsidies

= GNP at Market Prices - Depreciation-Indirect taxes + Subsidies.= National Income.

Normally, NNP at market prices is higher than NNP at factor cost because indirect taxes exceed government subsidies. However, NNP at market prices can be less than NNP at factor cost when government subsidies exceed indirect taxes. Normally, there are a wide number of theories of National Income and many economists are interested in discussing about such variable. This study combines of number of theories and these will help the researcher to maximize analysis on National income n Rwanda.

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). It was found the lending interest rate is determined by the funding cost, the loan size, and the efficiency level of microfinances. Lending rate is the bank rate that usually meets the short- and medium-term financing needs of the private sector. This rate is normally differentiated according to creditworthiness of borrowers and objectives of financing. Interest is money paid by a borrower to a lender for a credit or a similar liability. It is the charge for the privilege of borrowing money. Important examples are bond yields, interest paid for bank loans, and returns on savings. A modern economy is intrinsically linked to interest rates, thus their importance on the financial markets. Interest rates affect consumer spending. The higher the rate, the higher their loans will cost them, and the less they will be able to buy on credit. Interest rates are classified many we can state: Nominal interest rate, real interest rate, effective interest rate, and so on.

The nominal interest rate is conceptually the simplest type of interest rate. It is quite simply the stated interest rate of a given bond or loan. This type of interest rate is referred to as the coupon rate for fixed income investments, as it is the interest rate guaranteed by the issuer that was traditionally stamped on the coupons that were redeemed by the bondholders.

The nominal interest rate is in essence the actual monetary price that borrowers pay to lenders to use their money. If the nominal rate on a loan is 5%, then borrowers can expect to pay 5000 frw of interest for every 100,000 frw loaned to them.

The real interest rate is slightly more complex than the nominal rate but still fairly simple. The nominal interest rate doesn't tell the whole story because inflation reduces the lender's or investor's purchasing power so that they cannot buy the same amount of goods or services at payoff or maturity with a given amount of money as they can now.

The real interest rate is so named because it states the «real» rate that the lender or investor receives after inflation is factored in; that is, the interest rate that exceeds the inflation rate. If a bond that compounds annually has a 6% nominal yield and the inflation rate is 4%, then the real rate of interest is only 2%. So Nominal interest rate - Inflation = Real interest rate.

One other type of interest rate that investors and borrowers should know is called the effective rate, which takes the power of compounding into account.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. Inflation is a state of economy in which the general prices of commodities and services become high. Another way we can say that «too much money chasing too few goods». The so called consumer price indices are prominently used to calculate inflation. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called "price inflation". Economists generally agree that in the long run, inflation is caused by increases in the money supply. Inflationary problems arise when we experience unexpected inflation which is not adequately matched by a rise in people's incomes. If incomes do not increase along with the prices of goods, everyone's purchasing power has been effectively reduced, which can in turn lead to a slowing or stagnant economy. So someone can ask himself what exactly causes inflation in an economy. There is not a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:

1.5.1. Causes of inflation

Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since industrialized nations moved away from the gold standard during the past century, the value of money is determined by the amount of currency that is in circulation and the public's perception of the value of that money. When the Central Bank decides to put more money into circulation at a rate higher than the economy's growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more Rwandan currency chasing the same amount of goods in economy which will inevitably lead to increased demand and therefore higher prices.

Another factor in driving up prices of consumer goods and services is explained by an economic theory known as the `cost-push effect'. Essentially, this theory states that when companies are faced with increased input costs like raw goods and materials or wages, they will preserve their profitability by passing this increased cost of production onto the consumer in the form of higher prices. Inflation can be categorized into many but the most current ones are: Demand Pull Inflation this is a kind of inflation that occurs on demand side where the demand for goods and services exceed the supply.

Cost Push Inflation: this is a kind of inflation that occurs on the supply side where price increases due to an increase in price of other products.

For example, CPI on Jan 1, 2013 is 125 and that on Jan 1, 2014 is 133.75 then inflation for the year 2014 would be:

In economics, the reason for this is that if there is a country's debt increases, the government has two options: it can either raise taxes or print more money to pay off the debt. A rise in taxes will cause businesses to react by raising their prices to offset the increased corporate tax rate. Alternatively, should the government choose the latter option, printing more money will lead directly to an increase in the money supply, which will in turn lead to the devaluation of the currency and increased prices.

1.5.1. b Demand-Pull Inflation (On the demand side)

The demand-pull effect states that as wages increase within an economic system (often the case in a growing economy with low unemployment), people will have more money to spend on consumer goods. This increase in liquidity and demand for consumer goods results in an increase in demand for products. As a result of the increased demand, companies will raise prices to the level the consumer will bear in order to balance supply and demand. An example would be a huge increase in consumer demand for a product or service that the public determines to be cheap. For instance, when hourly wages increase, many people may determine to undertake home improvement projects. This increased demand for home improvement goods and services will result in price increases by house-painters, electricians, and other general contractors in order to offset the increased demand. This will in turn drive up prices across the board.

1.5.2 Keynesian inflation theory

The eminent economist John Maynard Keynes theorized a lot about inflation. He postulated that the money supply had an influence on inflation in a much more complex way than the strict monetarists suggested. Instead Keynes proposed that inflation was caused in number of different ways: By demand outstripping supply and pulling inflation higher, by inflation being built into the system, by higher costs pushing inflation higher. Below are examples of each of these types of causes of inflation.

Source: Kahn R (1976) `Inflation-Keynesian View' Scottish Journal of political Economy: London, UK Figure 1: Inflation Keynesian View

It was also Keynes's view that inflation expectations were important. They impact the wage settlements that workers seek and affect other inflation agreements that are created. These can have a marked effect on future inflation rates. Furthermore Keynes and his followers have argued that governments face a trade-off between unemployment and inflation i.e. if you want full employment you may need to tolerate higher inflation. Indeed, as Keynes was writing during the Great Depression (1929-1933), he not surprisingly gave great importance to reducing unemployment. This thinking paved the way for post-war governments that were less concerned about creating inflation than their predecessors, as they saw it as a necessary trade-off to create full employment. It is interesting that the Keynesian theory of inflation has gone out of fashion. This is probably related to the rejection of Keynesian thinking in

general which started in the 1970s. However Keynesian ideas have had something of a renaissance following the Great Recession of 2008 as governments seek alternative solutions to the problems we now face.

The exchange rate between two countries is the price which residents of those countries trade with each other. Economists distinguish between two exchange rates: Nominal exchange rate and Real exchange rate.

This is the relative price of the currency of two countries. In other words, the nominal exchange rate is the rate at which one currency trades against another on the foreign exchange market. The nominal exchange rate e is defined again as the number of units of the domestic currency that can purchase a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the currency. (Under the fixed exchange rate regime, a downward adjustment of the rate e is termed revaluation.) An increase in this variable is termed nominal depreciation of the currency. (Under the fixed exchange rate regime, an upward adjustment of the nominal rate e is called devaluation). When people refer to the exchange rate between two countries, they usually mean the nominal exchange rate. So the nominal exchange rate can be expressed as:

This is the relative price of the goods of two countries. It tells us the rate at which we can trade the goods of one country for good of another. The real exchange rate R is defined as the ratio of the price level abroad and the domestic price level, where the foreign price level is converted into domestic currency units via the current nominal exchange rate.

A decrease in å is termed appreciation of the real exchange rate, an increase is termed depreciation. The real rate tells how many times more or less goods and services can be purchased abroad (after conversion into a foreign currency) than in the domestic market for a given amount. In practice, changes of the real exchange rate rather than its absolute level are important. In contrast to the nominal exchange rate, the real exchange rate is always »floating», since even in the regime of a fixed nominal exchange rate e, the real exchange rate å can move via price level changes. Normally, it is the nominal exchange rate adjusted for inflation. Unlike most other real variables, this adjustment requires accounting for price levels in two currencies. Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or `Backus-Smith puzzle' has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly. Developed by James Duesenberry(1946), the relative income hypothesis states that an individual's attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living; the percentage of income consumed by an individual depends on his percentile position within the income.

It is reasonable to say that Adam Smith (1776) has played an important role in the development of welfare theory. The reasons are at least two: In the first place, he created the invisible hand idea that is one of the most fundamental equilibrating relations in economic theory, the equalization of rates of returns as enforces by a tendency of factors to move from low to high returns through the allocations of capital to individual industries by self-interested investors. The self-interest will results in an optimal allocation of capital for society. He writes: «every individual is continually exerting himself to find out the most advantageous employment for whatever capita he can command. It is his advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to society». Adam Smith does not stop there but notes that what is true for investment is true in economic activity in general.

«Every individual necessarily labors to render the annual revenues of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much is promoting it» He concludes: «It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from the regards of their own interest». The most famous line is probably the following: The individual is led by an invisible hand to promote an end which was no part of his own intention. The invisible hand is competition and this ides was present already in the work of the brilliant and undervalued Irish economist Richard Cantillon. He sees the invisible hand as embodied in the central planner, guiding the economy to social optimum.

The second reason why Adam Smith played an important role in the development of welfare theory is that, an attempt to explain the «Water and Diamond Paradox», he came across an important distinction in value theory. At the end of the fourth chapter of the first book in Adam Smith's celebrated volume The Wealth of Nations (1776), he brings up a valuation problem that is usually referred to as the Value Paradox². He writes.

CHAPTER 2: ANALYSIS OF THE STATUS AND TRENDS OF DETERMINANTS
AFFECTING AGGREGATE CONSUMPTION EXPENDITUTE IN RWANDA

In this chapter, the researcher analyzed the trends of consumption and its determinants. Using tables and graphs to describe the variable, the researcher tested the first hypothesis of these variables and found that gross consumption expenditure and its associates have the upward evolution. From the post-Genocide period, the wellbeing of people in the country increased gradually. Policies to enhance the standards of living of people in different economic sectors have been put into action.

2.1. Evolution of gross consumption expenditure in Rwanda 1995-2015

James Duesenberry (1946) in his relative income hypothesis rejected the fundamental assumption of consumption theory of Keynes. He challenged the assumption of the independence of individual's consumption and postulated interdependence in consumption behavior. He posited that consumption behavior is not independent but interdependent on the behavior of every other individual. He explained that people do not only derive satisfaction from consumption but also from how the consumption compares with that of others. (Ahuja: 2013).

As such, the relative size of a household income to that of other households determines consumption level. The hypothesis is based on three relative aspects:

? A household's income position is relative to its associates or group to which it belongs.

? The wellbeing of society depends on Government intervention through economic measures.

By this, he posited that households strive constantly toward a higher consumption level and emulate the consumption pattern of a neighbor. (Ohale: 2002).If income of all individuals/household increases by the same percentage, and then relative income would remain the same despite the increase in absolute income. Since the relative income remains the same, the same proportion of income would still be spent on consumption, Average Propensity to Consume (APC) will thus, remain the same. To capture the determinant of aggregate consumption expenditure in Rwanda, the following model has been specified by the researcher: GCE= f(Y, INT, INF, and EXR).Where GCE = Gross Consumption Expenditure Y= Income (GDP), INT= Interest Rate, INF= Inflation Rate, EXR= Foreign Exchange Rate.

? Gross Consumption Expenditure proxied by GCE is the consumption without tax or other contributions having been deducted. In other words, it is the consumption at current prices used by household in the community.

? Income: The researcher used GDP as a proxy for income. A positive sign is expected as there is a direct relationship between consumption and income. Consumption expenditure is expected to increase with an increase in income.

? Interest Rate: (Proxied by INT) an increase in lending interest rate may lead to a decrease or increase in consumption. As such, the expected sign was determined by researcher findings.

? Inflation Rate: we use INF as a prosy of inflation rate. This tries to capture the effect of increase in price level of consumption. When there is inflation (general price level increase), the real value of the consumer's cash balance is falls. As such their purchasing power is hampered, leading to a fall in consumption expenditure. Thus an inverse relationship is expected to occur between inflation and consumption; therefore, the researcher interpreted this hypothesis regression.

? Exchange Rate: The researcher used EXCHR as a proxy of exchange rate. The researcher attempted to capture how households react to changes in price of foreign goods by including exchange rate of Rwandan currency to dollar in the used model. This stems from the fact that about 1837.3 b Frw of consumer goods is imported from foreign countries which include food items, services, automobiles, etc. While Exported goods are 846.15 b Frw. Thus the expected sign of the relationship between exchange rate and consumption expenditure shown by the researcher after regression. To estimate the results, the researcher employed the ordinary least square (OLS) method of estimation to check for variables that determine consumption.

Year	GDP	EXCH	CPI	GCE
1995	338.21	262.18	37.5	327.73
1996	423.41	306.82	40.07	398.87
1997	557.83	301.53	44.88	527.68
1998	621.49	312.31	47.67	577.77
1999	607.77	333.94	46.52	554.34
2000	674.18	389.7	48.34	631.31
2001	739.79	442.99	49.95	637.91
2002	798.62	475.37	50.95	713.06
2003	994.65	537.65	54.74	876.37
2004	1206.87	577.45	61.45	1056.7
2005	1439.176	557.82	66.99	1149.1
2006	1715.81	551.71	72.94	1340.7
2007	2067.5	546.96	79.56	1520.6
2008	2624.88	546.85	91.85	2017.9
2009	3017.56	568.28	97.74	2318.6
2010	3323.84	583.13	100	2583.3
2011	3847.98	600.31	105.67	3001.6
2012	4435.24	614.3	112.3	3440.1
2013	4862.73	600.31	121.32	3614.7
2014	5379.87	614.3	122.87	3988.9
2015	5741	701.03	123.91	3862.7

Table 1: Status and trends of gross consumption expenditure, Gross domestic product, Interest rate, Consumer price indices (Inflation) and exchange rate in Rwanda from 1995 up to 2015

Figure 2: Status and trends of gross consumption expenditure, Gross domestic product, Interest rate, Consumer price indices and exchange rate in Rwanda from 1995 up to 2015

Gross Consumption Expenditure: According to the above figure, the post 1994 Genocide (from 1995), household consumption in Rwanda was very low where percentages show that 94.31 % of Rwandans consumed 327.73 Frw. Because of post war period, the economic system were destructed, infrastructures were ruined by the war so that every economic sector were shocked. But from 1995, statistics show that there is an increase of the level of gross consumption expenditure from 1995-2015 where it started from 327.73 Frw from 1995 and grew slowly until 2004 where consumption reached 1056.73. Within 3 years (from 2005 to 2007), the level of consumption grew quickly where it reached 1520.55 Frw. Because different initiatives put in economic sector by the Government of Rwanda, the level of consumption were increased at high rate where from 2008 to 2011, an increase of 983.67Frw whereby 78% of Rwandans consumed 3001.55Frw. From that period, the level of consumption grew slowly by 422.6 Frw because of different economic challenges.

Gross Domestic Product: According to the above figure, using the documentary technique, the researcher has obtained data from the World Bank. The data have been analyzed and interpreted using the statistical, analytical and synthetic methods. The statistical method helped the researcher to plot the evolution of GDP of Rwanda from 1995 to2015. The figure 2 above shows that the gross domestic product has the upward trends. They are increasing over time because from 1995 up to 2003, the level of GDP has grown by 656.44 b Frw, but because of economic reconstruction as well as the whole country, this level grew slowly in a period of 8years thereafter that period, the level of GDP grew rapidly because after presidential elections, many policies put in action such as increase of foreign direct investment, increase of domestic agro processing industries, financing the small and medium entrepreneurs, etc. Normally, this is shown by the above given figures where from 2004 up to 2009, there is a high increase compared to the starting period with 1810.69 b Frw which means that is are positive trend. From 2010 up to 2015, there is a continuous increase in GDP because the level of increase is 2417.16 b Frw.

Exchange rate: The exchange rate in Rwanda has been fluctuated in four main categories under relative period from 1995-2015. From 1995, the Government of Rwanda introduced the regime of floating exchange rate where this exchange rate is allowed to fluctuate in response to the economic condition. We normally know that in a fixed exchange rate regime, the Central Bank trades domestic for foreign currency at a predetermined level of price. The post Genocide period of 1995-2015 was a period of reconstruction in whole Country particularly in the economic system. Therefore, from 1995 up to 1999, the; level of exchange rate has been fluctuated (increased one hand and decreased on the other hand). The lower level of net export which is the exports minus imports is the main determinants of exchange rate. This lower level of net export was low from many years ago because Rwanda is a landlocked country and it does not have natural resources that can induce the level of domestic production as well as the level of export. With policy of monetary targeting used by the central bank of Rwanda, from 2000 up to 2005, the money market which is introduced in the period of 1999-2005 to increase the level of transactions among domestic commercial institutions. This has changed many things in Rwandan economic system. The system faced an increase in money supply where this increase in money causes a decrease of interest rate of bonds. Because we are in open economy, the domestic rate of interest would be equal to the world one. So the system faced many investors who converted Rwandan currency into foreign currency to invest outside of the Country (Capital outflows). There is therefore a depreciation of the domestic currency. This depreciation of the domestic currency causes the exchange rate to flow down, induce the level of net export without forgetting the level of income. Even if it is so, the national

export, at lower level than import, have a lower price outside the country. The introduction of capital market in Rwanda in 2005 did change nothing on depreciation of Rwanda currency. From 2005 up to 2011, the exchange rate continued to decrease where it shifted from 557.82 to 600.31 by one dollar. Because of the trade balance deficit faced by Rwanda economic system a longtime ago, there is a continuous decrease of exchange rate which depreciate our domestic currency whereby from 2012 to 2015, domestic currency depreciated by 2.81%. Without going far from the facts, an increase in Government spending (Expansionary fiscal policy) is the only solution because it can increase income and interest rate on bonds which can make capital inflows and appreciate the domestic currency. The level of exchange rate will increase which will lower net export and income. Thus offset occurs between incomes.

Inflation: The annual percentage change in a Consumer Price Index (Inflation) is used to measure inflation. The Consumer Price Index (CPI) can be used to index the real value of wages, salaries, pensions, and price regulation. It is one of the most closely watched national economic statistics. The consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption by households. It measures changes in the price level of a market basket of goods and services used by households. The CPI is calculated by collecting prices of a sample of representative items over a specific period of time. Goods and services are divided into categories, sub categories, and sub-indexes. All information is combined to produce the overall index of consumer expenditures. Such that the annual percentage change in a CPI is used to measure inflation, in Rwanda, the level of inflation measured by CPI, from 1996-2002, the levels of price were decreasing because many people were outside the country due to the 1994 Genocide while domestic production were high. With many programs of sensitizing refugees to comeback because of security, the level of population increased and the level of price started to rise due to lower level of production.

However, in 1999, a shock happened where the level of price decreased gradually and it riches a negative value. This was caused by high level of production (Supply) against lower level of demand. It is like a short run deflation. From 2003 up to 2008, a continuous rise of price occurred because of the continuous rise of the population. (DHS: 2005). But again from 2008 to 2015, because many policies put into action by the Government of Rwanda like, Girinka, Umurenge SACCOs, Agriculture policies of irrigation as well as new investments in different economic sectors like industrialization, financial institutions, and so on, all those policies increased the level of consumer goods therefore the level of price reduced by 12.9% which shows a high impact in the economy.

For example, imagine you buy five sandwiches, two magazines, and two pairs of jeans. In the first period, those goods are market basket at base period prices = 5(6.00) + 2(4.00) + 2(35.00) = 108.00. Market basket at current period prices = 5(7.00) + 2(6.00) + 2(45.00) = 137.00. The CPI represents the cost of a basket of goods and services across the country on a monthly basis. Those goods and services are broken into eight major groups: Food and beverages Housing, Apparel, Transportation, Medical care, Recreation, Education and communication and other goods and services. From the above example:

From the above figure, the rate of lending interest rate in Rwanda is at high level. Normally, Rwanda institutions seek for high return compared to the level of income as well as the rate of people that take credits in good collaboration with financial institutions to induce the level of investment in the community. From 1995 to 1999, the rate of lending interest was 17 and 16%. This is the post Genocide period where financial institutions started to reconstruct without enough capital as well as qualified employees. The monetary authorities and commercial banks have had faced the problem of dealing with the lower level of money. Measures were put in place to call upon people to use credits as a financial support in order to induce the level of investment in Rwanda as well as domestic production. Fluctuations continued where from 2003 to 2009, the level of interest rate changed from 16 to 17%. The introduction of money market and capital market (1999-2005) has had affected the increase of that rate. However a continuous depreciation of the domestic currency affects the level of interest rate because the economic system cannot attract foreign investors. From 2010 to 2015, the level of interest rate changed from 18 to 19%. Local people as small and medium entrepreneurs are not attracted by financial institutions to take loans because of that high level of interest rate. If is so, the level of investment cannot increase to affect the level of income. By lower level of income, household consumption is also decreased.

With the above findings, the explained variable GCE has upward trend as it is shown by numbers. By 1995 to 2003, the level of consumption increased from 327.73 Frw up to 876.37 Frw per household (96.95% to 88.1%) i.e 96.95 % of household in Rwanda consumed 327.73 Frw in 1995, this is the post 1994 Genocide in the country where all sectors including economic ones were destructed by conflicts. However, after presidential elections, the level of consumption in Rwanda has gradually increased again because of many policies put into action by the Government of Rwanda. From 2004 up to 2007, the levelof consumption faced a high increase because 87.55% up to 73.51% of Rwandan consumed between 1056.73 Frw to 1520.55 Frw. Thereafter, from 2008 up to 2015, the level of consumption has been increased by about 2.55% where a decrease vary between73.51% to 69.4%. Generally, from 1995 up to 2015, the level of income has affected positively the gross consumption expenditure. The continuous level of interest rate is a challenge to the household market basket. The level of inflation is also a challenge to the consumption because the income from investments is affected by inflation. A continuous depreciation of the domestic currency to the dollar causes the imported goods to be very expensive. Therefore, the next chapters give the econometric facts to know the exact relationship between variables used in the model. Therefore, the researcher affirms, based on the first hypothesis that the trends of the used model are upward sloping and the used variables are significantly related.

CHAPTER 3: ECONOMETRIC ANALYSIS OF THE RELATIONSHIP BETWEEN GROSS CONSUMPTION EXPENDITURE AND ITS DETERMINANTS IN

INTRODUCTION

In this chapter, we used econometric method in order to verify the second provisional answer in the research proposal. To reach targeted goals, the researcher has developed different point like: introduction to econometrics, specification of the model, expected sign, data processing, model estimation and diagnostic tests by using the series collected in the period of 1995 to 2015.

Econometric uses application of mathematical and statistics to economic data in order to support models

constructed by mathematical economics and obtain numerical results and to analyze the economic

phenomena. Econometrics quantifies the theoretical phenomena to test the existence of the relationship

and then specifies exact form. Econometrics begins formulating econometrics model. In this chapter,

we shall be testing the impact of income, interest rate; inflation rate and exchange rate on gross

consumption expenditure in Rwanda using econometrics software, find out economic interpretation on

3.1 Model specification

The analysis of the economic phenomena is based on some underlying logical structure known as a model. The model is a simplified version of the reality: the model describes the behavior of the variables in the system and it is the basic framework of the analysis. The model is in the form of equations,

composed by dependent variable and independent variables which are related. The startup of the model is the specification of a mathematical model. The mathematical model is an equation that expresses relationship between depend variable and independent variables: changes in dependent variable are explained 100% by changes occurred in independent variables. Once the researcher assumed that all changes in dependent variable are not 100% explained by changes in independent variables, the researcher has added on mathematical model a term to represent other factors that may have influence on the dependent variable. The model becomes an econometric model because of this error term. Normally we don't find a meant relationship among variables that is why we introduce a disturbance term or error term to represent other factors that may have influence on dependent variable. The model to be estimated concerns the determinants affecting aggregate consumption expenditure in Rwanda. Hence the Gross Consumption Expenditure (GCE) is the dependent variable and other variables are independent, the GCE is hypothetically assumed to be a function of consumption of household at current prices.

3.1.1 Hypothesis of the model

Theoretically, macroeconomic references predict that there is positive correlation between consumption

and income, a negative correlation between consumption and interest rate a negative correlation between

consumption and inflation and also a negative correlation between consumption between consumption

and exchange rate. The variables of the model are initially the consumption function modeled in the

For our case, the gross consumption function is proposed to be modeled in the following form: GCE:

f31, f32, f33 and f34: The coefficients of the model of coefficients of regression

3.1.2. Expected signs

The expected sign of the slope coefficients in model are: f30>0, f31>0, f32><0, f33<0, f34<0

f30>0: The intercept (stands for the autonomous consumption) is positively related to the explained variable GCE and to all explanatory variables.

f31>: This means that explanatory variable GDP is positively related to the explained variable GCE.

f32><: This means that the explanatory variable INT is positively or negatively related to the explained variable GCE.

f33<: Means that the explanatory variable INF is negatively related to the explained variable GCE.

f34><: Means that the explanatory variable EXCH is negatively or positively related to the explained variable GCE.

3.1.3 Test and analysis of the data

It is clear that most macroeconomic time series data are not stationary and are not linear. To make sure that there are all linear, all variables are transformed into logarithm. In order to avoid obtaining misleading statistical inferences, the researcher performed the stationarity test of all variables used in the model.

3.2. Data processing

In this study, we used annual time series data for the period 1995 to2015. Normally, most time series are non-stationary series in the model and might lead to spurious regressions. The first or the second difference terms of the most variables will usually be stationary.

3.2.1. Unit root tests

When economic time series are stationary, the application of Ordinary Least Squares (OLS) estimation is statistically acceptable; and when they are not stationary, the assumptions upon which OLS

Estimation are violated, rendering its application inappropriate. In this case we use the co-integration test. To test stationary of all-time series of our model, the E-views 7 software enabled us to use the test of the Augmented Dickey Fuller (ADF) and Phillips Peron (PP) tests. By applying the strategy of these tests incorporated in E-views software. Prior to carrying out a model, it is necessary to examine the time series properties of the variables included in it. This allows one to determine whether or not the regression is spurious. For this purpose, stationarity of data set is checked by using the simple appropriate tests above mentioned. The results of the stationarity obtained arise as follows in the table:

	EQUATION	ADF				PP			CONCLUSION
	EQUATION	lag	T-test	T-cri	Prob	T-test	T-cri	Prob	CONCLUSION
LNGCE	Intercept	0	-1.109913	-3.020686	0.690	-1.067673	-3.020686	0.707	LNGCE is not stationary at level
	Trend& Intercept	0	-1.480747	-3.658446	0.801	-11.710319	-3.658446	0.708
	None	0	5.932190	-1.959071	1.000	5.932190	-1.959071	1.000
LNGDP	Intercept	1	-0.479496	-3.029970	0.875	-0.887935	-3.020686	0.770	LNGDP is not stationary at level
	Trend& Intercept	3	-3.350081*	-3.710782	0.091	-1.654032	-3.658446	0.733
	None	1	1.967458**	-1.960171	0.984	6.832295** *	-1.969071	1.000
INT	Intercept	0	-0.240037	-3.020686	0.918	-0.059694	-3.020686	0.941	INT is not stationary at level
	Trend& Intercept	1	-3.157576	-3.673616	0.122	-3.639768*	-3.658446	0.051
	None	0	1.012776	-1.959071	0.911	1.231349	-1.959071	0.938
INF	Intercept	0	-2.822727*	-3.020686	0.072	-2.743902*	-3.020686	0.084	INF is not stationary at level
	Trend& Intercept	0	-2.747607	-3.658446	0.230	-2.680366	-3.658446	0.253
	None	0	-1.522258	-1.959071	0.117	-1.442881	-1.959071	0.134
LNEXCH	Intercept	0	-2.120302	-3.020686	0.239	-3.120302	-3.020686	0.239	LNEXCH is not stationary at level
	Trend& Intercept	3	-2.405621	-3.710482	0.363	-1.700882	-3.658446	0.712
	None	1	1.745474*	-1.960171	0.975	2.823701	-1.959071	0.997

Source: World Bank indicators1995-2015 and author's computation Table 2: Stationarity at Level

	EQUATION	ADF				PP			CONCLUSION
	EQUATION	lag	T-test	T-cri	Prob	T-test	T-cri	Prob	CONCLUSION
LNGCE	Intercept	0	-3.201338**	-3.029970l	0.035	-3.147755	-3.029970	0.039	LNGCE is not stationary at first difference
	Trend& Intercept	0	-3.170959	-3.676316	0.119	-3.140534	-3.673616	0.125
	None	1	-1.883162*	-1.961409	0.058	-1.783670*	-1.96071	0.073
LNGDP	Intercept	0	-2.698763*	-3.029970	0.092	-2.621696	-3.029970	0.106	LNGDP is not stationary at first difference
	Trend& Intercept	0	-2.634522	-3.676316	0.270	-2.570212	-3.673616	0.295
	None	0	-1.500754	-1.960171	0.121	-1.460394	-1.960171	0.130
INT	Intercept	1	-4.739894***	-3.040391	0.001	-5.966575***	-3.029970	0.000	INT is stationary at first difference
	Trend& Intercept	1	-4.740442**	-3.690814	0.007	-6.311193***	-3.673616	0.000
	None	0	-3.706693***	-1.960171	0.000	-3.704162***	-1.960171	0.000
INF	Intercept	0	-4.942504***	-3.029970	0.001	-8.562930***	-3.029970	0.000	INF is stationary at first difference
	Trend& Intercept	1	-4.880297***	-3.690814	0.005	-8.930822***	-3.673616	0.000
	None	0	-5.067116***	-1.960171	0.000	-8.255686***	-1.960171	0.000
LNEXCH	Intercept	3	-1.482842	-3.065585	0.516	-3.071608**	-3.029970	0.046	LNECH is not stationary at first difference
	Trend& Intercept	3	-1.531298	-3.733200	0.774	-2.637027	-3.673616	0.269
	None	0	-2.354457**	-1.960171	0.021	-2.354457**	-1.960171	0.021

Source: World Bank indicators1995-2015 and author's computation Table 3: Stationarity at first difference

	EQUATION	ADF				PP			CONCLUSION
	EQUATION	lag	T-test	T-cri	Prob	T-test	T-cri	Prob	CONCLUSION
LNGCE	Intercept	1	-6.094004***	-3.040391	0.000	-6.381671***	-3.040391	0.000	LNGCE is stationary at second difference
	Trend& Intercept	2	-3.708039*	-3.733200	0.042	-6.153897***	-3690814	0.000
	None	0	-6.123911***	-1.961409	0.000	-6.388171***	-1.961409	0.000
LNGDP	Intercept	0	-4.676807***	-3.040391	0.001	-4.831284***	-3.040391	0.001	LNGDP is stationary at second difference
	Trend& Intercept	1	-4.729190**	-3.710482	0.008	-4.610669**	-3.690814	0.009
	None	0	-4.709419***	-1.961409	0.000	-4.873309***	-1.961409	0.000
INT	Intercept	2	-5.474011***	-3.065585	0.000	-7.841476***	-3.040391	0.000	INT is stationary at second difference
	Trend& Intercept	2	-5.202147***	-3.733200	0.004	-9.109500***	-3.690814	0.000
	None	2	-5.738162***	-1.964418	0.000	-7.932883***	-1.961409	0.000
INF	Intercept	2	-5.472188***	-3.065585	0.000	-14.57497***	-3.040391	0.000	INF is stationary at second difference
	Trend & Intercept	2	-5.570167***	-3733200	0.002	-13.16833***	-3.690814	0.000
	None	2	-5.688618***	-1.964418	0.000	-14.48986***	-1.961409	0.000
LNEXCH	Intercept	3	-2.356842	-3.081002	0.048	-5.010709***	-3.040391	0.001	LNESCH is stationary at second difference
	Trend& Intercept	3	-2.407857	-3.759743	0.361	-4.836133**	-3.690814	0.006
	None	3	-2.402642**	-1.966270	0.020	-5.203143***	-1.961409	0.000

Source: World Bank indicators1995-2015 and author's computation Table 4: Stationarity at second difference

3.2.1.b. Interpretation of stationarity test From the above table, the so called stars:

***: Stationary at 1% level of significance **: stationary at 5% level of significance *: Stationary at 10 % level of significance

- LNGCE is not stationary at both level but it becomes stationary at second difference at 1% level of significance, when we consider all equations.

- LNGDP is not stationary at both level and first difference but it becomes stationary at second difference when we consider all equations.

- INT is not stationary at level but it becomes stationary at both first and second difference when we consider all equations.

- INF is not stationary at level but it is stationary at both first and second difference when we consider all equations using.

- LNEXCH is not stationary at level but it becomes stationary at first difference when we consider none by all equations and it is stationary at second difference when we consider all equations. Our model meets the condition for co-integration because all other series are integrated of the same order after being differentiated.

3.3 Estimation of long run model 3.3.1 Co-integration test

Co-integration is a statistical property of a collection of time series variables X1, X2... Xk. First, all of the series must be integrated of order 1, second, if a linear combination of this collection is integrated of order zero, then the collection is said to be co-integrated. With Johansen approach, we use trace and Maximum Eigenvalue tests to justify co-integration. If two or more series are themselves non-stationary but a linear combination of them is stationary, the series are said to be co-integrated. (KASAI, 2009:43).

Included observations: 19 after adjustments Trend assumption: Linear deterministic trend Series: LNGCE LNGDP INT INF LNEXCHR

Trace test indicates 3 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

* denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Source: World Bank indicators1995-2015 and author's computation Table 5: Long run Johansen Co-integration test output

3.3.2 Interpretation of Johansen Co-integration test output

From these findings, the researcher concluded that variables have a long run relationship.

3.3.3 Long run output

Table 6: Long run output effect of changes in GDP, INT, INF, and EXCHR on Gross Consumption Expenditure

3.3.3.1 Interpretation of the long run Model

? From the above output of long run equation, first, the gross domestic product (GDP) is positively related to gross consumption expenditure (GCE) as expected in theory. This means that, when GDP increases by one more units, GCE increases by 86% by considering other variables constant. (Ceteris paribus)

? Second, from the above table, the interest rate is negatively related to GCE which means that: increases by one more units in interest rate, decreases gross consumption expenditure (GCE) by 3.2%, ceteris paribus.

? Third, from our findings, the inflation rate is negatively related to GCE which means that: an increase by one more units in inflation rate decreases the GCE by 4.0% ceteris paribus.

? Fourth, from our findings, the exchange rate is negatively related to GCE which means that: an increase by one more unit in exchange rate (depreciation) decreases the GCE by 2.5% ceteris paribus.

The probabilities of coefficients show that all explanatory variables except that of the constant, are statistically significant because they are less than 0.05 or less than 5%.

The coefficient of Determination R-squared (R²) equals 99.8% indicates that the explanatory variables contribute significantly in explaining gross consumption expenditure. This is the indicator of a well fitted model. The Prob (F-statistic) of 0.0000 allow us to reject the null hypothesis which states that all explanatory variables do not collectively explain the explained variable and therefore all explanatory variables collectively influence the gross consumption expenditure.

3.3.4. Vector Auto-regression Estimates (Short run relationship) The system equation for the short run is:

Table 7: Short run relationship effect of changes in GDP, INT, INF, and EXCHR on Gross Consumption Expenditure

3.3.4.1. Interpretation of the short run equation and the coefficients of probabilities

From the above findings, the probability except C (1) and (C3) shows that individually, explanatory variables are not statistically significant to influence the dependent variable because they are greater than 5% level of significance except the GDP which has a probability of 4.1%. From the above results obtained from E-views8 software, not all conditions of a good model are observed:

The determination R-squared (R²⁾ is greater than 99.4% which also good for the model and from the output coefficients are not statistically significant to influence the dependent variable except the GDP. This is because their probabilities are greater than 5% level of significance except that of GDP which is 4.1% and this means that these independent variables are not significant to influence gross consumption expenditure in the short run.

3.4 Diagnostic tests

After testing the short run equation, the supplementary tests are necessary to verify if the hypothesis of classical regression are confirmed.

3.4.1 Jarque-bera test (Normality test)

Source: World Bank indicators1995-2015 and author's computation. Figure 3: Jarque-bera Test output

The null hypothesis is not rejected because the probability of 33% is greater than 10%.

The null hypothesis is not rejected means that residuals are normally distributed.

3.4.2 Breusch-Godfrey test (Serial correlation LM test) The E-views 8 estimation output is the following:

Source: World Bank indicators1995-2015 and author's computation Table 8: Serial correlation tests

The assumptions for this test are the following: H0: no serial correlation (errors are not correlated). H1: There is serial correlation.

The probability of obs* R-squared is 54% greater than 10% which means that the model has not the errors of residuals autocorrelation.

3.4.3 Heteroscedasticity Test (Breusch Pagan Godfrey)

Source: World Bank indicators1995-2015 and author's computation. Table 9: Heteroscedasticity Test

The assumptions for this test are the following: Ho: the model is not homoscedastic

The probability of Scaled explained SS (Chi- square) 98% is greater than 10% level of significance which means that the model is homoscedastic.

3.5 Stability tests

3.5.1 Ramsey reset test

The test above mentioned indicates whether the model is well specified or not. The assumptions for this test are as follows;

Source: World Bank indicators1995-2015 and author's computation Table 10: Ramsey reset Test

From the above finding, the probability of 22% is greater than 10% level of significance which means that we accept the null hypothesis therefore the specification of the model is good.in other words, the model is BLUE ( Best Linear Unbiased Estimator).

3.5.2 Recursive estimates (OLS only): Cusum test

With CUSUM test, the pace of the graph shows that the parameters of this model are stable when it is noticed that the representative curve is located between the two lines indicating the critical point of 10% level of significance. If it is not so, parameters are said to be unstable.

Source: World Bank indicators1995-2015 and author's computation Figure 4: Cusum test

The graph shows that the parameters are stable because the shape of the curve is (shape in blue color) between two critical points.

This chapter was aimed to verify the impact of National income (GDP), interest rate, inflation rate and exchange rate on gross consumption expenditure in Rwanda. To achieve our goal, we have chosen different econometric tests, the unit root test shows used variables are not stationary at both level and stationary first difference but they are stationary at second difference. We have undertaken co-integration test and estimate long and short run equation. After estimation, the researcher has realized that in the long-run analysis, GDP are related positively to the GCE. All coefficients independent variables are statistically significant at 5% level of reference, in long-run. R-squared equals 99.8% and Adjusted R-squared equals 99%, show the goodness-of-fit of estimated model. Up to 99.2% of long-run fluctuations in GCE are influenced by changes GDP. By these findings, the researcher affirms the second hypothesis above verified stated that there is statistical significant relationship between GCE and its associates in Rwanda. According to the result of diagnostic test, that the model is good and respects the classical assumption of homoscedasticity, no autocorrelation of errors and no serial correlation as well, there is

normality of residuals and stability of parameters. The researcher also noted that the model is stable. Therefore, the researchers affirm the second hypothesis that there is a long run relationship between gross consumption expenditure and its associates in Rwanda from1995-2015.

From the above output of long run equation, one, the gross domestic product (GDP) is positively related to gross consumption expenditure (GCE) as expected in theory. This means that, when GDP increases by one more units, GCE increases by 86% by considering other variables constant. (Ceteris paribus)

Two, the interest rate is negatively related to GCE which means that: increases by one more units in interest rate, decreases gross consumption expenditure (GCE) by 3.2%, ceteris paribus. This is because the higher the interest, the lower the investment and this discourages consumption.

Three, from the findings, the inflation rate is negatively related to GCE which means that an increase by one more units in inflation rate decreases the GCE by 4.0% ceteris paribus. This is because a continuous rise in prices reduces the level of consumption expenditure.

Four, the exchange rate is negatively related to GCE which means that: an increase by one more units in exchange rate (depreciation) decreases the GCE by 2.5% ceteris paribus. Rwanda like other developing countries depends much on imports and this shows how the demand for the foreign currency ($) is always high compared to the demand of the local currency. The level of export like Tea, and Coffee is very low and its price is also low compared to foreign export on international market. Therefore the Government has to intervene with its reserves to cover this deficit therefore the wellbeing of the community can be enhanced in Rwanda.

If Rwanda wants to induce its level of economy, maintain the wellbeing of people and become more competitive in order to participate in international trade, the following should be done:

V' Policymakers in Rwanda should strengthen efforts to control the rate of inflation in order to become more competitive in durable way. This can be achieved if internal as well as external sources of inflation are addressed.

V' Rwanda should continue to encourage capital inflows and investments from local investors as well as foreign investors. Investors are revenues from capital inflows should be oriented in sectors where Rwanda has comparative advantages by insisting on sectors which can allow the country to increase exports and improve its competitiveness in international markets. For sure, the increase and a good management of those investments can help the country firms to enjoy economies of

scale and their advantages. This will help the country to increase its level of domestic production and the welfare of the community.

V' Rwanda is advised to continue to encourage investments and orient them in technological use and that technology should be used in strategic sectors able to increase the Rwanda production and export as well. The technological use also can allow the country to produce more and to export products with increased value. This high level of production will reduce the level of unemployment which is at high level and will reduce the external dependency as well.

V' As openness has been found to bring effects on Rwandan competitiveness in international trade while closeness brings negative effects on it, Rwanda is advised to continue its movement of reducing trade barriers in international trade. This can be done by supporting the idea of economic integration but via increment of production in quality and quantity as well as the cheapest ways of connecting the country with other countries should be a priority. Economic authorities must sensitize people to participate in economic integration and expand the market. Rwanda is advised to look forward rapid economic growth to middle income status via implementing development policies, increase poverty reduction measures, enhance private sector as engine of growth via increasing youth entrepreneurship and job creation therefore the welfare can be consistent.

	(0.56873)	(0.32078)	(1.81185)	(20.5919)	(0.31166)
	[ 0.21692]	[ 1.11529]	[-1.13703]	[ 1.01777]	[-0.06997]
C	0.034490	-1.478500	9.862714	-53.04916	1.245924
	(1.32734)	(0.74866)	(4.22861)	(48.0585)	(0.72737)
	[ 0.02598]	[-1.97485]	[ 2.33238]	[-1.10385]	[ 1.71291]
R-squared	0.994725	0.998666	0.972631	0.801377	0.985683
Adj. R-squared	0.988131	0.996999	0.938419	0.553098	0.967786
Sum sq. resids	0.051826	0.016487	0.525985	67.93888	0.015563
S.E. equation	0.080487	0.045397	0.256414	2.914166	0.044106
F-statistic	150.8530	599.0038	28.42987	3.227731	55.07711
Log likelihood	29.13108	40.01133	7.115920	-39.06444	40.55951
Akaike AIC	-1.908535	-3.053824	0.408851	5.269941	-3.111527
Schwarz SC	-1.361754	-2.507044	0.955631	5.816722	-2.564747
Mean dependent	7.254886	7.458007	17.54053	6.294737	6.225143
S.D. dependent	0.738783	0.828705	1.033282	4.359214	0.245744
Determinant resid covariance (dof
adj.)		6.99E-11
Determinant resid covariance		9.25E-13
Log likelihood		128.4321
Akaike information criterion		-7.729693
Schwarz criterion		-4.995790

Included observations: 19 Total system (balanced) observations 95
	Coefficient	Std. Error	t-Statistic	Prob.
C(1)	-0.899257	0.846944	-1.061766	0.2947	C(2)
-0.617883	0.949425	-0.650798	0.5189	C(3)
2.170760	1.080837	2.008406	0.0414	C(4)
-0.089151	1.215976	-0.073317	0.9419	C(5)
0.130199	0.085195	1.528257	0.1343	C(6)
-0.014809	0.069715	-0.212417	0.8329	C(7)
-0.007165	0.010308	-0.695113	0.4910	C(8)
-0.001416	0.006843	-0.206958	0.8371	C(9)
0.000271	0.515974	0.000525	0.9996	C(10)
0.123375	0.568734	0.216929	0.8294	C(11)
0.034467	1.327341	0.025967	0.9794

Effects of changes in GDP, interest rate, inflation and exchange rate on gross consumption
expenditure in Rwanda

Hypothesized No. of CE(s)	Eigenvalue	Trace Statistic	0.05 Critical Value	Prob.**
None *	0.986335	149.9639	69.81889	0.0000
At most 1 *	0.862347	68.39784	47.85613	0.0002
At most 2 *	0.614846	30.72045	29.79707	0.0390
At most 3	0.446337	12.59231	15.49471	0.1306
At most 4	0.069054	1.359523	3.841466	0.2436

Trace test indicates 3 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Hypothesized No. of CE(s)	Eigenvalue	Max-Eigen Statistic	0.05 Critical Value	Prob.**
None *	0.986335	81.56606	33.87687	0.0000
At most 1 *	0.862347	37.67739	27.58434	0.0018
At most 2	0.614846	18.12814	21.13162	0.1251
At most 3	0.446337	11.23279	14.26460	0.1429
At most 4	0.069054	1.359523	3.841466	0.2436

Max-eigenvalue test indicates 2 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values