1.1 Background and problem statement.
“Consumption is assumed to be the main component of aggregate demand and therefore has a remarkable importance in economic analysis in general and macroeconomics in particular” (Saad 2011). “The consumption function is the central cog of the macroeconomic model of income determination.” (Van Zyl 1973)”It is essential to know how the population of a country spends as they experience variations in their income. The Keynesian model serves as a qualitative guide that is based on the premise that the consumption function is a valid behavioural hypothesis of major importance. Hence the verification of the hypothesis (and measurement of the MPC) is such an important task” (Keynes 1927). The main objective of the study of consumption functions and is to help a student to understand and appreciate the aggregative behaviour of the economy as a whole. (Sakkim Manipal University 2011)
The relation between aggregate income and aggregate consumption is a significant component in explaining the analysis of national Income. The effect of consumption function on economic fluctuations was mentioned by all the eminent economists from Malthus to Wicksell in explaining the business cycle literature and its contribution in economic development (Banerjee and Shivanni 2011).The necessity of estimating a consumption function is based on the premise of making valid predictions about consumption behaviour in an economy.
The advent of numerous data products and the advancement of statistical techniques have had economists excited at the opportunity to test theories about consumption since Keynes “General Theory”(H Molana 1991). There have been varying results as to the validity of models though an important outcome has been the creation of an economic tool in the name of the consumption function. Deductions from these models influence fiscal and monetary policy and act as a guide to the choice of trajectory of numerous modern day economies. Economists are constantly working all the time to maintain up to date consumption functions to aid policy making and more crucially monitor economic performance. This creates the need to have the South African case be examined necessitating the estimation of the South African consumption function. 1.2 Objectives
* Determine trends in consumption in South Africa between 1960-2010 * Draw conclusions and make policy recommendations based on the study.
This research will enable policy makers to understand the dynamics in consumption. It will contribute to a scarce body of knowledge about South African consumption function. Technology has changed the rate at which people consume and the ways in which they consume money and near moneys have evolved over time making it easier to spend. An extended observation window of 1960-2010 would also give an opportunity to come up with more information than has been discovered by other researchers who performed this research in South Africa before. 1.4 Structure of proposal
The lay out of this proposal from henceforth will entail a literature review of the topic followed by the methodology. This first section deals with the interrogation of previous theoretical and empirical literature concerning consumption. Valuable insights on how the phenomenon has been conceptualised and investigated will be outlined her. A Methodology chapter will distil from the literature review the research approach that will be adopted 2. Literature review
A wide body of literature exists for the consumption function both at a theoretical and empirical level. Much effort has been put into the estimation of consumption functions over the 20th century. Numerous empirical investigations ensued to test the viability of the claims made by Keynes. This then resulted in the development of more theories and empirics on the consumption function. Most theories of the consumption function were formulated to reconcile the...
Please join StudyMode to read the full document