Dedication

I dedicate all my eforts to

Almighty Allah,
The creator of the universe
And
The Holy Prophet (PBUH),
The cause of the creation of the universe
To my parents,
The symbol of love and kindness
And
To my teachers,
The light of knowledge in darkness of ignorance
To my friends,
The pillars of trust and support,
And
To my relatives,
The motivators and encouragers
DECLARATION
I hereby declare that the matters printed in this report titled Determinants of
Consumption: A Comparative Analysis of Various Income Classes in Bahawalnagar is
my own work and has not been printed, published or submitted as research work thesis or
publication in any university or institution in Pakistan or aboard in my knowledge and all
the matter printed in this reports is not copied from anywhere.

APPROVAL CERTIFICATE
The supervisory committee certificated that the contents and form of thesis
submitted by Babar Hussain Roll No. 02 have been found satisfactory and recommend
that it can be processed for evaluation, by the External Examiner for the award of degree
of Bs. ommerce..
Superisor! """"""""""""""""""""""""""
Hea# o$ %&e Depar%'en%! """""""""""""""""""""""""""
E(%ernal Ealua%or! """""""""""""""""""""""""""


!!!!!!!!!!!!!!!!!!!!!!!!!
AC)NO*LED+E,ENTS
Interdependence is a higher value than independence.
This work is a synergistic product of many minds. I am grateful for the inspiration and
wisdom of many thinkers and for the trans"generational sources and roots of this wisdom.
The material and arrangement has slowly evolved and has imbued those who have been
sincerely and deeply immersed in it with the conviction that this work represents a
holistic, integrated approach to personal and interpersonal effectiveness.
#or the development and production of the study itself I feel a deep sense of gratitude$
___to Ms.Safora Sadique for his supervision, %uidance and encouragement throughout
this research. I always found him very much alive, full of &eal, vitality and intellectual
curiosity. 'ithout his ideas, remarks and endless interest this work could not have been
carried out and completed.
!!!!! to finally acknowledge my friends, who all have played different roles in keeping
me focused and positive throughout this important time.
Table o$ Con%en%s
(bstract$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" i
). Introduction$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" )
).) Types of consumption$ """"""""""""""""""""""""""""""""""""""""""""""""""""" *
).+ onsumption of ,urable and -on",urable %oods$ """""""""""""""""""" .
).* Income classes$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/
).. Bahawalnagar"The 0esearch (rea$ """""""""""""""""""""""""""""""""""""""1
)./ 2b3ectives of the study$ """""""""""""""""""""""""""""""""""""""""""""""""""" 4
).1 5ignificance of the study$ """""""""""""""""""""""""""""""""""""""""""""""""" 6
).7 5cheme of the study$ """""""""""""""""""""""""""""""""""""""""""""""""""""""" 6
+. 8iterature 0eview$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" )9
*. Theoretical frame work$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""").
*.) :eynesians cross$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""").
*.+ 8ong and 5hort 0un consumption #unction$ """""""""""""""""""""""""""" )1
*.* ,etermining #actors of onsumption$ """"""""""""""""""""""""""""""""""" )7
.. ;ethodology of ,ata$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""" )6
..) 5tatement of the Problem """"""""""""""""""""""""""""""""""""""""""""""""""" )6
..+ 0esearch <uestion$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""")6
..* =ypothesis$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" )6
... Target Population$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""" +9
../ 5tudy ,esign$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" +9
..1 ;odel 5pecification > 2perational ,efinition of ?ariables$ """"""""""" +9
..7 ;ethod of Estimation$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""" +)
..4 ,ata ollection Process$ """"""""""""""""""""""""""""""""""""""""""""""""""""""" +)
/. 0esults and ,iscussions$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""" ++
/.) -on"Econometric (nalysis$ """"""""""""""""""""""""""""""""""""""""""""""""""" ++
/.+ Econometric (nalysis$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""" +4
1. onclusion and 5uggestions$ """""""""""""""""""""""""""""""""""""""""""""""""""""""*6
7. 0eferences$ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" ii
4. (nnexure I$ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" v
ABSTRACT
This study sets out to construct an up"to"date consumption function. (s the standard of
living can also be 3udged by the consumption or expenditures of the household so
determinants of consumption among various income classes in Bahawalnagar are
explored and the assumption of :eynesians consumption function that ;P always
remains between 9 to ) is also examined among respondents of different income classes.
5tratified random sampling is used to collect first hand information through interviews
using a structured interview schedule from different income classes in focus area. 2rdinal
least s@uare method is applied to estimate the determinants of consumption in various
income classes. #indings reveal that assets of the respondent, dependency ratio and
earning assets of the respondent have positive and significant impact for the consumption
function of the household in Bahawalnagar. 'hile savings of the household and marital
status of the respondent have negative and significant impact for the consumption
function of the household in Bahawalnagar.
CHAPTER -
INTROD.CTION
onsumption is remained an issue of interest among economists from both micro and
macro economics perspectiveA however the ma3or roles of the consumption function is to
estimate the aggregate consumption BBarrot, +991C. onsumption can be explained here
as all the final goods and services, that people in Pakistan consume.
onsumption refers to the process in which all the parts of a commodity or thing have
been completely used. onsumption of goods and services means is the part of them that
have been consumed in a particular time period.
onsumption can also be defined by the concept of production of goods and services, but
if we want to see it @uite precisely than we can say that it can vary because of different
school of thoughts, different school of economists define production differently, as
mainstream economists believe that consumption only includes the ultimate purchase of
goods and services that is made by an individual, while other types of expenditures like,
fixed investment, intermediate consumption and government spending classified in
different categories.
;any other economists define consumption with a variety of words one of them
considered consumption means all the economic activities that does not includes design,
production and marketing of goods and services Be.g. the choice, use, disposal of goods
and servicesC.
'e can measure consumption through different methods such as energy in energy
economics metrics. In addition, by using the consumption function one can measure, the
total consumption in an economy that simply explains that consumption is a function of
the aggregate disposable income. The disposable income can be defined in many ways
such as a personDs personal income which is free from all kinds of taxes and he can
consume that according to his wish.
:eynes B)6*1C explored many hypotheses, one of them is the relationship between
consumption and income that consumption will increase due to increase in income but
not with the same proportion as marginal propensity to consume B;PC.
But according to our experience or the fundamental psychological laws on which we are
dependent with a lot of confidence we can say that men have a specified attitude, and due
to this their consumption is not increases with the same ratio as income increases. -o
doubt that the study of the consumption function has established some of the highest
correlations as well as some of the most embarrassing forecasts in the history of
economics. Eet, the interest in the sub3ect continues unabated since, if it were possible to
establish the existence of a stable relation between consumption, income, and other
relevant variables and to estimate its parameters, such a relation would represent an
invaluable tool for economic policy and forecasting.
(ccording to the theory of intertemporal choice, consumption is also affected by the
current interest rate as well as future rate of interest. Individual have to made choice
between two time periods, one is current time period and other is future time period. To
make the choice, a rational consumer first see the rate of interest in both time periods, if
current rate of interest will high then the consumer will save more because the reward of
savings is higher than the consumption. The substitution effect on consumption of the rise
in interest rate will increase savings in the current time period, since the rewards for
savings has risen Barlin > 5oskice, +99/C. 5avings in the current time period increases
because the opportunity cost of consuming has increased, this means the consumption in
the future time period increases.
(ccording to law of demand and supply consumption is also affected by the prices of the
commodities. If the prices of the commodities decreases then its demand increases and
due to this consumption of that commodity increases and there is a significant increase in
over all consumption of the economy due to decrease in prices. If we see supply side, the
decrease in the prices causes the decrease in the outputA producer decreases their
production and due to this consumption of the commodity also decreases.
But one thing should be noted here that prices have different effects on different goods.
#or example, if the prices of inferior goods decrease and the income of the individual
increases then individual do not use it any more and its demand decreases with the
decrease in the prices hence, the consumption of such goods also decreases.
But if, two commodities are better substitutes of each other then the increase in the prices
of one commodity decreases the demand of that good and increase the demand of other.
(nd as a result the consumption of first good decreases while second goods consumption
increases.
5imilarly if, two goods are compliment for each other then the increase in the prices of
one good also increase the demand for other good. =ence, the increase in the prices of
first good increases the demand of second in the case of complimentary goods.
-.- T/pes o$ Consu'p%ion
There are different types of consumptionA here we will discuss some important types of
consumption such as the important purchases, repetitive consumption, involuntary
consumption and %roup consumption B0obert, )667C.
-.-.- I'por%an% pur0&ases
Important purchases are usually novel or infre@uently performed and may demand time
and effort of the decision"maker B0obert, )667C. =owever these purchases are high
involvement Ba purchase of a carC. This type of action also includes serious life"choices
outside the field of consumer behavior, such as what 3ob to take and whether to have
children B0obert, )667C.
-.-.2 Repe%i%ie 0onsu'p%ion!
5ome purchases are made again and againA if we look the items purchased on the last trip
to the supermarket, we see that we bought most of them many times before. Therefore
when learning theory is concerned with repeated behavior and is therefore relevant to
fre@uent purchase. %enerally fre@uent purchase re@uires little conscious attention thus is
described as low involvement B0obert, )667C.
-.-.1 Inolun%ar/ 0onsu'p%ion
Involuntary consumption has individual and social forms. Individually, we have to buy
petrol if we use a car and we may find it difficult to manage without such conveniences
as telephones. 2n the other hand, social form of involuntary consumption occurs when
products are collectively, rather than individually, provided. ;any of the services that we
use are of this form as for example the repair of roads. Thus in this case there is no
market we cannot switch suppliers, as the control of product @uality can only be achieved
by influencing the supplying organi&ation. B0obert, )667C.
-.-.2 +roup Consu'p%ion!
'hen a fourth distinction is between purchases that are individually made and those that
are based on some group influence process. ;uch consumer expenditure in the family
reflects the preferences of different family members and many industrial decisions are
similarly based on the views of a decision"making unit B ,;FC composed of a few key
personal B0obert, )667C.
-.2 Consu'p%ion o$ Durable an# Non3Durable +oo#s!
( durable good is a good which one can not @uickly wear out, we can also identify these
as hard goods. #urthermore particularly, it yields services or utility over time rather than
being completely used up when used once. Therefore we can say that most of the
consumption goods are durable goods to a certain degree. 'hile, if we talk about
perfectly durable good then the situation will be change. (ccording to some economists
such type of goods can not wear out in any way. =ere, we can present an example for
such type of good to explain it more briefly and for an example we can take a rubber
band which is not very durable.
5ome examples of durable goods are photographic e@uipment, business e@uipment, home
furnishings and fixtures, appliances, house ware and accessories, toys and games,
sporting goods, electronic e@uipment, recreational goods and cars.
,urable goods are typically characteri&ed by long interpurchase times""the time between
two successive purchases.
-on durable goods are the opposite of the durable goods and we can also identify these as
soft goods. 2ne can classify these goods as goods that are used up when used once, or the
goods that have a lifespan of less than three years.
5ome of the examples of non"durable goods are clothing and footwear, cosmetics, fuel,
office supplies, paper and paper products, personal products, packaging and containers,
cleaning products, rubber, textiles, foods,
,urable goods, non"durable goods and services together constitute the consumption of an
economy.
-.1 In0o'e Classes!
In our study, we have used different classes for income as lower income class, middle
income class, and upper middle income class. 'e can define these classes as,
In0o'e Class In0o'e Ran4e 5Rs.6
8ower Income lass 9 " +9,999
;iddle Income lass +9,999 G /9,999
Fpper ;iddle Income lass /9,999 G above
-.1.- Lo7er in0o'e 0lass!
'e can say that the person who is occupying the lowest socio"economic status in the
society because of low income classified as lower income class person. 'e classified the
person as a lower income class whose earning is 9"+9,999 per month in this study.
-.1.2 ,i##le In0o'e Class!
'e can say that the person who is occupying a socioeconomic position intermediate
between those of the lower income classes and the wealthy classes included in the middle
income class. The person whoDs earning is +9,999"/9,999 per month as a middle income
class.
-.1.1 .pper ,i##le In0o'e Class!
'e can say that the person who is occupying the highest socioeconomic position in the
society related to their income can be classified as upper income class. The income class
which earns /9,999" above classified as upper middle income class.
-.2 Ba&a7alna4ar "T&e Resear0& Area!
Bahawalnagar ,istrict is a ,istrict of Pun3ab Province in Pakistan. Before the autonomy
of Pakistan, the district was placed on the border. Bahawalnagar was a part
of Bahawalpur 5tate governed by the -awab of Bahawalpur. The city of Bahawalnagar is
the capital of the district.
-.2.- His%or/
The -awab of Bahawalpur expresses the attachment with Pakistan because 66H of the
population was ;uslim. (fterward, the whole state became part of the Pun3ab province.
The old name of Bahawalnagar was I0o3han 'aaliI.
-.2.2 Lan4ua4e
(ccording to general survey of )664, Pun3abi language was the language that was spoken
and understands by the ma3ority of the district population while there were also other
three languages that were spoken that are ;arwari, Frdu and 5araiki.
-.2.1 Dis%ri0% Boun#aries
The borders of Bahawalnagar in the 5outh and East touches the Indian region
while ,istrict Bahawalpur exists in its 'est and river 5utle3 flows on its -orthern
side. The area which is possessed by the ,istrict Bahawalnagar spreads over an
area of 4474 s@uare kilometers.
-.2.2 A#'inis%ra%ion
The ,istrict of Bahawalnagar is spread over an area of 4,474 s@uare kilometres
comprising five tehsils and ))4 Fnion ouncils.
-.2.8 Popula%ion an# li%era0/ ra%e
(ccording to a national survey of Pakistan, the population of Bahawalnagar is +,91),..7
of which )4.49H. The sub"ampus of Islamia Fniversity is also located here.
-.2.9 Tribes an# Clans
Bahawalnagar is an old district and even before partition it was the biggest district area
wise in 5outh (sia. People living here are before )6.7 with rich culture and
heritage. Basically people are agriculturists and during -awab of Bahawalpur rule
the irrigation system was one of the largest fed by 0iver 5utlu3. ;ain tribes with
various sub tribes
areA Bhatti, ;alik, Jatt, ;ahar,8odhiBPathanC,0a3put, (rain, 'attoo, %organi, Johiy
a, 5ukheras, :hakwani, hishti and many other small clans. ;ost progressive
are (rain, Jatt, 'attoo and %organi.
-.2.: In#us%r/
,ain To7ns! ;ecload %un3 ,harnwala 0atteka, -e&a Jodheka, +.9khokran wali,
:hara3pura, ,onga Bonga, Takhat ;ehal, ;andi 5adi@ %un3, ;andi %organ,
#a@irwali, ;adrisa, ,ahranwala, Eateemwala, ;aroot, <a&iwala and Bukhshan
:han, Bala (rain, #ateh :ot, ;aharwali, Pan3kosi,;a@sood (bad BBasti 8angahC.
Jen3eranwali, Togera 5harif and madina town, :orian 'ali ?illage.
,ain Crops! 5ugarcane, otton, 'heat, 0ice, Tobacco and ;ustard 5eed.
,ain Frui%s! itrus, %uavas, ;ango and ,ate BfruitC.
,ain Ve4e%ables! auliflower, 2nion, Turnip, arrot, Potato and Tomato. #orest B(rea
in (cres$ +.,)6/.
,a;or In#us%ries! 0ice ;ills about )1.746/ acres of land is under cultivation. #au3i
#ertili&er ompany 8td. is the ma3or supplier of fertili&er to the area and its
contribution in catering and maintaining the fertility of the area is about 1/H. Frea,
,(P, 52P and Boran are being offered under the orporate Brand name of 52-(
for the balanced and synergi&ed use of fertili&er to achieve profitable yield.
-.2.< Cli'a%e an# e4e%a%ion!
Bahawalnagar has a very hot and very dry climate in summer, with a maximum
temperature reaching above /9 K. The climate in winter is very dry and cold. The
minimum temperature recorded was below ))K. 'ind and storms are @uite
uncommon during the summer. The average annual rainfall in the district is 3ust
below 66 mm. The district may be divided into three parts. These are the riverain
area, the canal irrigated plain and the desert area. The riverain area of the district
lies close to the 5atlu3 0iver which flows in the -orth"'est along its border
with 2kara, Pakpattan, and 5ahiwal and ?ehari districts. The land in this area is
irrigated by non"perennial canals. ,uring the summer monsoons, the area is
generally in"undated by the river water. The canal irrigated area is a plain which
has been brought under cultivation by the canals. The main canal which is 5ad@ia
canal irrigates almost all the tehsils except hishtian. This canal travels in round
with the border of Pakistan and India. The desert area of the district is called
the holistan. The surface of this desert consists of a succession of sand dunes,
rising in places to a height of )/9 meters. It is covered with the vegetation peculiar
to the sandy tracts. The main crops of Bahawalnagar are cotton, wheat and rice.
-.8 Ob;e0%ies o$ %&e s%u#/!
The main ob3ective of the study is to find out the determinants of consumption in
Bahawalnagar among various income classes.
This study also includes different sub ob3ectives that areA
To examine the impact of household locality on consumption among different
income classes in Bahawalnagar ,istrict.
To explore the impact of ,ependency 0atio on onsumption among various
income classes in focus area.
To find out the impact of marital status on onsumption among various income
classes in Bahawalnagar.
To investigate the impact of savings of household on onsumption among various
income classes in the interested area.
To explore the impact of assets of the respondent on consumption among various
income classes in Bahawalnagar.
To find out the impact of earning assets of the respondent among various income
classes in Bahawalnagar.
To find out whether the individuals in Bahawalnagar follows the assumption of
:eynesians onsumption #unction B;P always remains between 9 to )C or not.
-.9 Si4ni$i0an0e o$ %&e S%u#/
-ot only in economics but also in all other social sciences consumption is a very
common and important concept. (ccording to 5olow growth model consumption of an
individual can also describe hisLher living standard. =igher consumption is a sign of high
living standard and vice"versa. 5o, in the light of these theories we have tried to know
about the living standard of the individuals living in Bahawalnagar through knowing the
consumption pattern of the individuals living in Bahawalnagar. #urther we have been
analy&ed that whether people in Bahawalnagar follows the assumption of :eynesians
onsumption #unction B;P always remain between 9 to )C or not.
-.: S0&e'e o$ %&e s%u#/!
This paper is divided into different chapters as first chapter is about introduction of the
topic, chapter + briefly discusses the literature. hapter * introduces the theoretical
framework. hapter . tells about the data and the process of its estimation. hapter /
includes data and result discussion on the variables consumption, income, household
locality, dependency ratio, age, education, marital status, depression. hapter 1 gives
conclusion and possible suggestion.
CHAPTER 2
LITERAT.RE REVIE*
:eynes B)6*1C suggested that an individualDs consumption is based solely on their
income. :eynes theori&ed that, as income went up, consumption would also rise up but
not by the same amount as income due to people saving part of their income B;c,onald,
+994C. (s a general rule, when the absolute value of income increases, the gap between
the proportions of income used for saving to consumption increases. The average
propensity to consume B(PC is falling as income increases B,onna, +996C.
#riedman B)6/7C developed the Permanent Income =ypothesis BPI=C and stresses on the
microeconomic level of consumption, and suggested that an individualDs consumption
depends upon his permanent income. In this consumption function the (P is based on
the ratio of current level of income and permanent income. The PI= assumes that people
are rational and sensible problems solver, who prefer smoothness rather than volatility
with regards to consumption B;iller, +991C. :eynesians consumption function
concentrated on short"term consumption, while #riedman PI= considered the long"term
consumption of an individual. (ccording to permanent PI= the actual income of an
individual is made up of two partsA a permanent part and a transitory part. The transitory
part 9f an income is the random deviation from the average or permanent income, which
is the part that is expected to persist B;ankiw, +99*C. -ow on these bases consumption
now depends upon both permanent and transitory income and previous consumption.
#riedmanDs analysis shows that in the short"run the (P is variable, whereas in the long"
run the (P is constant.
;odigliani and Blumberg B)6/.C presented the 8ife ycle =ypothesis B8=C and stresses
on the importance of age because youths and elderly maintain consumption by borrowing
or calling on assets, respectively, when income is low. The 8= predicts that the
consumption pattern of a person depends on the resources available to him over the life
time. (ccording to it people will create or build up assets in the time of earnings or when
income is plentiful and uses them in time of retirement or low income. 0ational decision
making is an assumption of this model, relating to peopleDs spending B,eaton, +99/C.
(ggregate consumption according to this consumption function depends upon wealth and
income B;ankiw, +99*C. (ccording to PI= any unexpected income is saved rather than to
consume but, in the 8=, it is spread over the life time of consumption. Both the PI= and
8= suggested that consumption not only depends on current disposable income but also
on all future disposable income.
:u&nets B+999C discovered that, the ratio of consumption and income was stable and the
(P was constant in the long"run but, whereas in the short"run the (P decreases as
income increases. This led to the discussion that there could be two consumption
functions$ a short"run and a long"run. :u&netsD study on consumption in F5( found that
if people had no source of income then they would over the long"run consume a very
small amount or nothing at all.
Tang B+991C in his study in (ustralia of housing wealth effect on consumption concludes
that the long"run effects of housing wealth increased consumption. (n increase in house
prices leads to homeowners having an increase in e@uity on their property. (n increase in
e@uity means that homeowners now have greater margins in which to use their house as
collateral against secured lending B5tevens, +996C. =ouse prices effects peopleDs
willingness to borrow, changes in house prices are important factor in the economy for
expectations. If house prices are increasing then people expect higher output and lower
unemployment.
(oki et al. B+99+C suggested that, house prices are a part of the transmission mechanism
and that they are affected by the changes in short"term interest as a result of the
transmission mechanism.
=all B)674C predicts that consumers are forward"looking and their consumption based on
the future income. =e continued the PI= by adding the assumption of rational
expectations, #riedmanDs PI= used adaptive expectations where, if a consumerDs actual
income differ then the expectations in the next year will adapt using a weighted average
of previous periods BBlack, +99+C. =all argued that, under certain conditions,
consumption will follow a random walkA therefore assuming that consumption is
smoothed over time, the only reason for consumption to change is when income
unexpectedly changes B%riffiths > 'all, +99)C. =all also found that next yearDs
consumption will also be affected by the last yearDs income. This is due to credit channels
in which past income will restrict future borrowing limits. Borrowing for future
consumption is based on previous income due to borrowing constraints B%riffiths > 'all,
+99)C.
;uellbauer > ;urphy B)66*C carried out the empirical studies on the F.: aggregate
consumption function and found that their results when using @uarterly data fitted better
with stronger co"efficient that with the annual data.
,avid B+99/C conducted a study on the determinants for onsumption ;aterialism
among late adolescent in china and found that adolescents in china were more centrality"
oriented in their purchases, more interested in adopting new products and more likely to
be influenced by marketing promotions, thus resulting in an over all higher tendency for
consumption materialism. 'hile on the other hand, the parent generation shows
significantly lower levels of materialistic values. The result is evidenced by controlling
various demographic variables such as gender, age, education, family, and income and
city tier. #urther, family income is only significant for the adult group.
'odon B)661C carried the study on the micro determinants of consumption, poverty,
growth and ine@uality in Bangladesh and found that education, occupation, and location
all affects consumption and poverty. Increase in per capita consumption is highly
correlated with these household variables. =e found that households living in the ,haka
,istricts have better standard of living as compare to other districts especially in rural
areas. (ccording to him most of the families have less per capita consumption. =e
believes that the families with the female heads consume less and their per capita
consumption is less as compare to those families which have a male head. #urther, he
founds that education and consumption are positively correlated which means education
returns are greater and also explored that this reality is same for al of the family
members. In urban areas the household with the head and spouse that have been
completed secondary school consumed almost doubled that of a similar household with
illiterate head and spouse B<uentin, )661C. In rural areas this ratio is comparatively lower,
but still high at about 19 percent. There are also large differences in standards of living by
occupation, with non"farm households being better off than many farm households in
rural areas B<uentin, )661C.
arbonell B+99.C explored the effect of income on consumption and well"being of the
individual using the data of %52EP Ba large germinal panelC. The study concludes that
the individuals with higher income as compare to their reference groups are happier in
their consumption pattern, but this fact is not applied in 'est %ermany. #urther he
stresses that a higher income provides higher indifference curve for a dis"satisfied
consumer and allows him to consume more and more. =e suggests that income co"relates
with the consumption and well"being of the individuals weakly. 2n the other side, a high
income allows people in modern societies to buy expensive cars, en3oy luxurious leisure
activities, purchased the latest technologically to exotic countries. This implies that more
income leads to more consumption and to well"being of individuals.
C&ap%er 1
THEORETICAL FRA,E*OR)!
:eynesians B)6*1C suggested that an individualDs consumption was based solely on their
income.
)e/nesians Cross!
M aN bE
is consumption where OaD is
autonomous consumption and b is
marginal propensity to consume B;PC.
Theoretically a P or M to 9 and o Q b Q ).
:eynes theori&ed that as income rose up
consumption also increases but not with
the same amount as income increases
due to people saving part of their income
B;c,onald, +994C. (s a general rule,
when the absolute value of income increases, the gap between the proportions of income
used for savings to consumption increases.
dLdEM b M ;P
(s b increases the ;P increases.
(P M LE
The average propensity B(PC to consume is falling as income increases because a is
positive. #riedman B)6/7C theori&ed that the consumption of an individual depends upon
his permanent income. The permanent income hypothesis BPI=C presented by the ;ilton
#riedman suggested that the actual income of an individual is made up of two partsA a
permanent and a transitory part.
E M Ep N Et
E is actual income. Ep is permanent income and Et is transitory income. The transitory
part of income is the random deviation from the average or permanent income, which is
the part that is expected to persist B;ankiw, +99*C.
M a N bE N ct")
onsumption now depends on income Bboth permanent and transitoryC and previous
consumption. 'ith this consumption function a distinction can be made between the
short run and long run ;P as shown belowA
50;P Mb
80;P M bL )" c
'ith this consumption function if interest rate raises people will feel more secure to have
some money as savings. #riedmanDs analysis shows that the (P is variable in the short
run, whereas in the long run it is constant. The choices that people make with regards to
their consumption depend upon their expectations of their long"term income so then their
current disposable income, as :eynes suggested.
;odigliani and Brumberg B)6/.C presented a theory with the name of 8ife ycle
=ypothesis B8=C. It predicts that a person will consume with regards to the resources
available to them over their life time. 0ational decision making is an assumption of this
model, relating to peopleDs spending B,eaton, +99/C. The aggregate consumption function
with the 8= isA
M a' N bE
(ggregate consumption according to this consumption function depends upon wealth
B'C and income BEC where a is e@ual to ;P for wealth and b is e@ual to ;P for
income B;ankiw, +99*C. 'ithin the PI= any unexpected income is saved instead of
consume but in the 8=, it is spread over the life time of consumption.
The 8=, in comparison suggests that a permanent raise in the assets of an individual has
a positive wealth effect and a negative income and substitution effect on consumption
B(ron et al., +991C.
0obert B)674C explored in his theory of PI=, under certain conditions, consumption will
follow a random walkA therefore assuming that consumption is smoothed over time, the
only reason for consumption to change is when income is unexpectedly changes
B%riffiths and 'all, +99)C.
tN) M t N etN)
'here et M) is a random amount that results from unexpected shocks.
(bove e@uation shows that, unless there is a random shock, there will be no incentive to
change consumption patterns assuming that the household has included all relevant and
available information. =all also found that next years consumption will also be affected
by last years income. This is due to credit channels in which past income will restrict
future borrowing limits. Borrowing for future consumption is based on previous income
due to borrowing constraints B%riffiths > 'all, +99)C.
5imon :u&nets theori&ed that, in the long run, the ratio of income and consumption was
stable and that the (P in the long run was a constant, whereas in the short run the (P
fell as income rose. This led to the prognosis that there could be two consumption
functionA a short run and a long run.
Lon4 an# S&or% Run Consu'p%ion Fun0%ion=
Both consumption functions have
constant ;Ps but different (Ps.
The long run consumption function
has a steeper slope then the short run
consumption function and it also
passes through the origin whereas
the short run consumption function
intersects the axis at point a
BEdgmand, )64*C.
:u&nets research on consumption in the F5( and funds that the consumption function
was much steeper then previously estimated and that a was approximately 9, as it passes
through the origin. This shows that if people had no source of income then they would
over the long run consume a very small amount and nothing at all.
De%er'inin4 Fa0%ors o$ Consu'p%ion!
onsumption is determined by the six main factors that can be explained by a diagram
given belowA
onsumption is solely based on six main factors that are savings of the households,
personal expenditures of the respondent, dependency ratio, depression level, assets of the
respondents and also the earning assets of the respondents.
5avings of the households is an important variable that affects the consumption of the
household as many economics theories suggests. (ccording to :eynesians if, the savings
of an individual or household increasing then its mean his consumption is reducing. 8ets
suppose income of a household is +9,999 per month and the savings is *999 and
consumption is )7999 of that household now if, the savings increases from *999 to /999
then consumption automatically reduces from )7999 to )/999 but the condition is income
remains constant that is +9,999.
,ependency ratio also plays an important role in consumption of the household. If the
dependency ratio increases then the consumption of that household increases. 8etDs
suppose one person is consuming )999 rupees per month now if, another member added
in it who is dependent and his consumption is also )999 rupees per month then total
household expenditures automatically increases due to increase in the dependency ratio.
(ssets of the respondents also have a significant impact on consumption. There is
positive relationship between assets and consumption as assets of the respondent
increases hisLher consumption also increases.
Personal expenditures of the respondent is also another cause of the increase or decrease
in the total household expenditures because total house hold expenditures includes
personal expenditures of the head and expenditures of the other family members so, if
personal expenditures increases then it means the total household expenditures increasing
and vice versa.
Earning assets also have a significant impact on consumption. If the earning assets of an
individual increases then its mean his income is increasing and as the :eynesians
consumption function suggested that if the income of an individual increases his
consumption will also increase. =ence, with the increase in the earning assets the
consumption of the individual will also increase due to increase in the income with the
increase in the earning assets.
CHAPTER 2
,ETHODOLO+>
This section includes statement of the problem, research @uestion, hypothesis, target
population, study design, model specification and operational definition of variables,
method of estimation and data collection process.
1.-S%a%e'en% o$ %&e Proble'!
'e want to compare the consumption of various income classes in Bahawalnagar. #urther
what are the determinants of consumption in Bahawalnagar and also want to investigate
whether individuals in Bahawalnagar follows the assumption of :eynesians consumption
function B;P always remains between 9 to )C or not.
1.2 Resear0& ?ues%ion!
#ollowing are the proposed research @uestions that have been answered in our study$
'hat are the determinants of consumption in BahawalnagarR
'hether the individuals in Bahawalnagar follow the assumption of :eynesians
onsumption #unction B;P always remains between 9 to )C or notR
1.1 H/po%&esis$
#ollowing are the hypotheses that will be tested in our study$
=o$" People in Bahawalnagar follows the assumption of :eynesians
onsumption #unction B;P always remains between 9 to )C or not.
=)$" People in Bahawalnagar do not follow the assumption of :eynesians
onsumption #unction B;P always remains between 9 to )C
=o$" The determinants of consumption among various income classes in
Bahawalnagar are the same.
=)$" The determinants of consumption among various income classes in
Bahawalnagar are not the same.
1.2S%u#/ Desi4n!
The study is exploratory in nature as it is going to explore the determinants of
consumption among various income classes in Bahawalnagar. It is also an experimental
study as we are going to do experiment in this study to check whether the individuals in
Bahawalnagar follow the assumption of :eynesiansD consumption function or not.
1.2.- Tar4e% Popula%ion$
2ur target population for this study is the population of Bahawalnagar.
1.2.2 Sa'ple Si@e!
The sample si&e for this study is )99.
1.9 ,o#el Spe0i$i0a%ion A Opera%ional De$ini%ion o$ Variables!
The specified model for this study isA

M f B E(20, 52=, ;I, F;IC
Da%a Spe0i$i0a%ion!
?ariable 5pecification
M onsumption of
households for lower
income class.
;easured in rupees per
month.
E(20 M Earning assets of
the respondent
;easured in rupees per
month.
52= M 5avings of the
household
;easured in rupees per
month.
;I M ;iddle income class an be operationali&ed as
household income between
+9,999 pLm to /9,999 pLm
F;I M Fpper middle an be operationali&ed as
income class household income between
/),999 pLm and above.
1.: ,e%&o# o$ Es%i'a%ion!
The model which we use in this study is the multiple regression model and we have apply
285 on this model to estimate it. The data analysis is ross 5ectional. #urther we have
apply the t"test for individualDs Beta testing and #"test for testing the over all significance.
'e have also test the =eteroscedasticity through 5pearmanDs 0ank orrelation Test and
(utocorrelation through ,urbin"'atson d Test and ;ulticolinearity is also tested.
1.< Da%a Colle0%ion Pro0ess!
It is a cross"sectional analysis. The data which we use in this study is primary and has
been collected from the head of households through a structured interview schedule.
CHAPTER 8
RES.LTS AND DISC.SSIONS!
This chapter includes two sections, first is non"econometric analysis and second is
econometric analysis.
8.- Non3E0ono'e%ri0 Anal/sis!
The following variables has been tested for this studyA household expenditures as
dependent variable, age of the respondent, education of the respondent, religious
education of the respondent, income of the respondent, savings of the household, marital
status of the respondent, household locality of the respondent, household si&e of the
respondent, family system of the respondent, part time 3ob holders of the household,
number of the dependents, average household education, household income, accessories
BfacilitiesC in household, assets of the respondent, dependency ratio, earning assets of the
respondent, personal expenditures of the respondent, middle income class, upper middle
income class and depression level of respondent as independent variables.
Table 8.-.- Aera4e A4e o$ Respon#en%s
(verage age ByearsC 0ange ByearsC
./ ++ G 17
Table /.).) shows the average age and range of age of respondents. (verage age of
respondents is ./ years and range of age of respondents is ++ years to 17 years.
Table 8.-.2 Sa'ple Co'posi%ion o$ +en#er
;ale BpercentageC #emale BpercentageC
)99 9
Table /.).+ describing the sample composition of gender measured in percentage. #irst
columns show that the male percentage is )99 in our study while second columns show
that there is 9 percent of female.
Table 8.-.1 Aera4e E#u0a%ion o$ %&e Respon#en%s
(verage EducationByearsC 0ange ByearsC
4 9 G )1
Table /.).* shows the average education and range of respondents. (verage education of
respondents is 4 years and range of education of respondents is 9 year to )1 years.
Table 8.-.2 Aera4e Reli4ious E#u0a%ion
(verage 0eligious
Education ByearsC
0ange ByearsC
) 9 G )9
Table /.).. shows the average religious education and range of respondents. (verage
religious education of respondents is ) year and range of religious education of
respondents is 9 year to )9 years.
Table 8.-.8 Aera4e In0o'e o$ %&e Respon#en%
(verage income B0upees
per monthC
0ange Brupees per monthC
4+)4 *999 G 4/999
Table /.)./ shows the average income and range of income of respondents. (verage
income of respondents is 4+)4 rupees per month and range of income of respondents is
*999 rupees to 4/999 rupees per month.
Table 8.-.9 Aera4e Sain4s o$ %&e Respon#en%
(verage 5avings
Brupees per monthC
0ange Brupees per
monthC
616* 9 G ..999
Table /.).1 shows the average savings and range of savings of respondents. (verage
savings of respondents is 616* rupees per month and range of savings of respondents is 9
rupees to ..999 rupees per month.
Table 8.-.: Aera4e Personal E(pen#i%ures o$ %&e Respon#en%s
(verage personal
expenditures Brupees per
monthC
0ange Brupees per
monthC
.19+ 9 G */999
Table /.).7 shows the average personal expenditures and range of average personal
expenditures of respondents. (verage personal expenditures of respondents is .19+
rupees per month and range of personal expenditures of respondents is 9 rupees to */999
rupees per month.
Table 8.-.< Sa'ple Co'posi%ion 7i%& respe0% %o ,ari%al S%a%us
;arried
BpercentageC
Fnmarried
BpercentageC
Ever
;arried
BpercentageC
49 7 )*
Table /.).4 is describing the sample composition of marital status of the respondents
measured in percentage. #irst columns show that the percentage for married is 49 in our
study while second columns show that the percentage for unmarried is 7 and third
columns show that the percentage for ever married is )*.
Table 8.-.B Sa'ple Co'posi%ion 7i%& respe0% %o House&ol# Lo0ali%/
Frban BpercentageC 0ural BpercentageC
)99 9
Table /.).6 is describing the sample composition with respect to household locality that is
measured in percentage. #irst column of the table shows that sample composition with
respect to household locality is )99 percent urban while second column clears that 9
percent composition is about rural.
Table 8.-.-0 Sa'ple Co'posi%ion 7i%& respe0% %o Fa'il/ S/s%e' o$ %&e
Respon#en%s
-uclear BpercentageC Joint BpercentageC
*9 79
Table /.).)9 is describing the sample composition with respect to family system of the
respondents that is measured in percentage. #irst column of the table shows that sample
composition with respect to family system is *9 percent nuclear while second column
clears that 79 percent composition is about 3oint family system.
Table 8.-.-- Aera4e House&ol# si@e o$ %&e Respon#en%s
(verage household
si&e Bin numbers of
membersC
0ange Bin numbers
of membersC
/ + G )/
Table /.).)) shows the average household si&e and range of household si&e of
respondents. (verage household si&e of respondents is / members and range of household
si&e of respondents is + members to )/ members.
Table 8.-.-2 Aera4e Par% Ti'e Cob Hol#ers o$ %&e House&ol# o$ %&e
Respon#en%s
(verage part time 3ob
holders Bin numbers
of membersC
0ange Bin numbers
of membersC
. 9 G /
Table /.).)+ shows the average part time 3ob holders of the household and range of part
time 3ob holders of the household of respondents. (verage part time 3ob holders of the
household of respondents are . members and range of part time 3ob holders of the
household of respondents is 9 members to / members.
Table 8.-.-1 Sa'ple Co'posi%ion 7i%& respe0% %o Earnin4 Asse%s o$ %&e
Respon#en%s
0espondents having
earning assets
BpercentageC
0espondents having
no earning assets
BpercentageC
+4 7+
Table /.).)* is describing the sample composition with respect to earning assets of the
respondents that is measured in percentage. #irst column of the table shows that sample
composition with respect to earning assets of the respondent is +4 percent for those
respondents who have any earning asset while second column clears that 7+ percent
composition is about the respondents who does not own any earning assets.
Table 8.-.-2 Aera4e To%al House&ol# E(pen#i%ures o$ %&e Respon#en%s
(verage total
household
0ange Brupees per
monthC
expenditures Brupees
per monthC
+1+.1 /999 G 1/999
Table /.).). shows the average total household expenditures and range of total household
expenditures of respondents. (verage total household expenditures of respondents are
+1+.1 rupees per month and range of total household expenditures of respondents is /999
rupees to 1/999 rupees per month.
Table 8.-.-8 Sa'ple Co'posi%ion 7i%& respe0% %o Asse%s o$ %&e
Respon#en%
0espondents having
any asset
BpercentageC
0espondents not
having any asset
BpercentageC
/4 .+
Table /.).)/ is describing the sample composition with respect to assets of the
respondents that is measured in percentage. #irst column of the table shows that sample
composition with respect to assets of the respondent is /4 percent for those respondents
who have any asset while second column clears that .+ percent composition is about the
respondents who does not own any asset.
Table 8.-.-9 Aera4e Nu'ber o$ Depen#en%s o$ %&e Respon#en%
(verage of number
of respondent Bin
numbersC
0ange Bin numbers C
+ 9 G 6
Table /.).)1 shows the average number of dependents and range of number of
dependents of respondents. (verage number of dependents of respondents is + members
and range of number of dependents of respondents is 9 members to 6 members.
Table 8.-.-: Aera4e House&ol# E#u0a%ion o$ %&e Respon#en%s
(verage household
education ByearsC
0ange ByearsC
)) 9 G )+
Table /.).)7 shows the average household education and range of household education of
respondents. (verage household education of respondents is )) years and range of
household education of respondents is 9 year to )+ years.
Table 8.-.-< Aera4e House&ol# In0o'e o$ %&e Respon#en%s
(verage household
income Brupees per
monthC
0ange Brupees per
monthC
*1*91 /999 G 46999
Table /.).)4 shows the average household income and range of household income of
respondents. (verage household income of respondents is *1*91 rupees per month and
range of household income of respondents is /999 rupees to 46999 rupees per month.
8.2 E0ono'e%ri0 Anal/sis!
Table /.+.) is showing all the variables which are entered or removed and also tells about
the method which we have used in this regression.
(s we can see that all the re@uested variables have been entered no one removed and the
method which we have used in this model is Enter.
Table 8.2.2 DESCRIPTIVE STATISTICS
Table /.+.+ is describing the descriptive statistics about all the variables. (s we can see
that in this table the number of observation B-C for the total household expenditures are
)/9 and the mean value of total household expenditures of the respondent for this number
of observations is +.1+.7E. which means the average value of the total household
expenditures of the respondent is +1+.7 per month and the standard deviation for this
variable is ).+.*.77+/* which is showing that total household expenditures deviates
from the mean value by this amount.
5imilarly for the variable, savings of the household of the respondent the number of
observations are )/9 and the mean value for this is 6.16**E* which interprets that the
mean or average value of this variable among )/9 observations is 616* or we can say that
the average savings of the household is 616* per month and the standard deviation for
this variable is ))))9.)/.)7 which shows that savings of the household deviates from the
mean value by this amount.
.
Table 8.2.1 ,ODEL S.,,AR>
Mean Std. Deviation N
total household expenditures
of the respondent
2.6247E4 14243.77253 150
Middle ino!e lass .33 .473 150
"pper !iddle ino!e lass .33 .473 150
savin#s of the household $.6$33E3 11110.15417 150
earnin# assets of the
respondent
.2$ .454 150
Model % % S&uare
'd(usted %
S&uare
Std. Error of the
Esti!ate Dur)in*+atson
1 .$62
a
.$26 .$23 3$45.5,546 1.725
Table /.+.* is describing the model summary. The value of 0 is .61+ which measures the
correlations of co"efficient and this value of 0 is showing that there is a positive
correlation among the dependent and independent variables.
The 0 s@uare for this model is .6+1, which means that .6+1 of the fluctuations seen in the
dependent variable can be explained due to explanatory variables.
The value of ad3usted 0 5@uare for this model is .6+*. (d3usted 0 5@uare is the 0 5@uare
that has been ad3usted on degrees of freedom. This is essential when comparing models
because the 0 5@uare can simply increase by increasing more and more explanatory
variables. It is the ad3usted 0 5@uare that is used to compare models as it take into
account the different number of variables and hence the differences in degrees of freedom
for each model
The ,urbin"'atson value for this model is ).7+/. The best value for a ,' test is + from
the scale 9 to .. This value of ,' is showing that there is no multicollinearity is in the
model and this value also 3ustify that the functional form which we have used for this
model is absolutely correct.
Table 8.2.2 ANOVA
Model Su! of S&uares df Mean S&uare - Si#.
1 %e#ression 2.7$$E10 5 5.5$,E$ 35$.56, .000
a
%esidual 2.242E$ 144 1.557E7
.otal 3.023E10 14$
Table /.+.. is showing the (-2?( which tells about the overall significance of the
model, sum of s@uares, mean s@uare and also degree of freedom B,#C.
(s table showing for our model the value of total sum of s@uares is *.9+*E)9 which
expresses that *.9+*E)9 variation is in the dependent variable Btotal household
expendituresC about their sample mean.
The value of explained sum of s@uare is +.766E)9 which is showing that there is
+.766E)9 variation in the estimated dependent variable Btotal household expendituresC
values about their sample mean.
The value of residual sum of s@uare is +.+.+E6 which shows that there is +.+.+E6
unexplained variation of the dependent variable about the regression line.
The value of # is */6./14 which is very large concluding that the overall model is
significant and the level of significance is )99H as showing in the last column of the
table.
Table 8.2.8 COEFFICIENTS
Model
"nstandardi/ed 0oeffiients
Standardi/ed
0oeffiients
t Si#. 1 Std. Error 1eta
1 20onstant3 47225.146 275$.,7, 17.111 .000
Middle ino!e lass 43,6.5,$ 1011.,20 .146 4.335 .000
"pper !iddle ino!e lass 1,20$.334 1$,1.470 .605 $.1$0 .000
savin#s of the household *.1,2 .051 *.142 *3.534 .001
earnin# assets of the
respondent
1,07.6,0 76$.,$5 .05, 2.34, .020
Table /.+./ is about the coefficients of the model. In our model the value of the intercept
or bench mark is .7++/.).1 which is showing that the expenditures of our base class that
is lower income class are .7++/.).1.
The value of the coefficient of middle income class is .*41./46 which show that the total
household expenditures of the middle income class is greater then the constant that is
lower income class by this amount. (nd the aggregate expenditures of the middle income
class are +*7/).)+1.
The t value for this variable is ..**/ which expresses that the variable is significant and
the level of significance is )99H.
The value of the coefficient of upper middle income class is )4+96.**. which concludes
that the household expenditures of the upper middle income class is greater then the base
class by the amount of )4+96.**. that is lower income class which value was .7++/.).1.
(nd the aggregate expenditures of the upper middle income class are /9*7/.))6.
The t value for this variable is 6.)69 which expresses that our variable is significant and
the level of significance is )99H as can see in the last column of the table.
-ow, the value for savings of the household is ".)4+ which clears that there is a negative
relationship between household expenditures and savings of the household as household
expenditures increases the savings of the household deceases by the amount of .)4+.
The t value for household savings is "*./*. which shows that the variable is significant
and the level of significance is 66H as its sign in the table is .99).
The value of the earning assets of the respondent is )497.149. 'e take the class which
have no earning assets as the base class so, this value of the earning assets shows that the
household expenditures of the respondent for the class having earning assets is greater
then the class having no earning assets by the amount of )497.149 and the aggregate
expenditures of the class which have earning assets are //.*4.6*4.
The t value is +.*.4 which 3ustify that the variable is significant and the level of
significance is 64H..
The t value is ")*./*9 which clears that the variable is significant and the level of
significance is )99H.
Table 8.2.9 CORRELATIONS
total household
expenditures of the
respondent
Middle ino!e
lass
"pper !iddle
ino!e lass
savin#s of the
household
earnin#
assets of
the
responde
nt
Depression
sore of the
respondent
4earson
0orrelation
.otal
household
expenditures
of the
respondent
1.000 *.124 .,2$ .643 *.13$ *.$32
Middle ino!e
lass
*.124 1.000 *.500 *.311 .115 .031
"pper !iddle
ino!e lass
.,2$ *.500 1.000 .,11 *.2$2 *.73$
Savin#s of the
household
.643 *.311 .,11 1.000 *.1$, *.603
Earnin# assets
of the
respondent
*.13$ .115 *.2$2 *.1$, 1.000 .111
depression
sore of the
respondent
*.$32 .031 *.73$ *.603 .111 1.000
Si#. 21*
tailed3
.otal
household
expenditures
of the
respondent
. .066 .000 .000 .045 .000
Middle ino!e
lass
.066 . .000 .000 .0,1 .354
"pper !iddle
ino!e lass
.000 .000 . .000 .000 .000
Savin#s of the
household
.000 .000 .000 . .00, .000
Earnin# assets
of the
respondent
.045 .0,1 .000 .00, . .0,,
total household
expenditures of the
respondent
Middle ino!e
lass
"pper !iddle
ino!e lass
savin#s of the
household
earnin#
assets of
the
responde
nt
Depression
sore of the
respondent
depression
sore of the
respondent
.000 .354 .000 .000 .0,, .
N .otal
household
expenditures
of the
respondent
150 150 150 150 150 150
Middle ino!e
lass
150 150 150 150 150 150
"pper !iddle
ino!e lass
150 150 150 150 150 150
Savin#s of the
household
150 150 150 150 150 150
Earnin# assets
of the
respondent
150 150 150 150 150 150
Table /.+.1 describing the correlations between the variables used in the model. #irst see
the correlation of household expenditures with other variables. The Pearson correlation
value for the middle income class is ".)+. which means there is negative correlation
between the household expenditures and the middle income class and the values of upper
middle income class, savings of the household are .4+6, .1.* respectively which is
describing that there is positive correlations between these variables and household
expenditures. 5imilarly the Pearson correlation values of earning assets and depression
score are ".)*6 and ".6*+ respectively which indicates that there is negative correlation
between these variables and household expenditures.
-ow, explaining the correlations between middle income class and other variables. The
Pearson correlation value for the total household expenditures Bsee the .th column, +
nd
rowC is the ".)+. which clears that there is negative correlation between total household
expenditures and the middle income class and we can see in the same column the values
for upper middle income class, savings of the household are "./99, ".*)), respectively
which describes that there is negative correlation between middle income class and these
variables. 5imilarly, the values of earning assets of the respondent and the depression
score are the .))/ and .9*) respectively which shows that there is positive correlation
between middle income class and these variables.
The relation between upper middle income class and other variables can be predicted by
their values and the value for the total household expenditures Bsee /
th
column, +
nd
rowC is
.4+6 which is showing that there is positive correlation between household expenditures
and the upper middle income class. The value for savings of the households is .4)) which
interprets that there is positive correlation between upper middle income class and this
variable. The values for middle income, earning assets of the respondents and the
depression score are "./99, ".+6+ and ".7*6 respectively which shows that there is
negative correlation between upper middle income class and these variables.
The relationship between savings of the household and other variables areA total
household expenditures and upper middle income class of the respondent are positively
correlated with the savings of the household as showing their values of Pearson
correlation .1.*, .4)), respectively while other variables are negatively correlated with
the savings of the household.
Earning assets of the respondent is positively correlated with middle income class and
depression score of the respondent while other variables are negatively correlated with
earning assets of the respondent as showing their values in the table.
CHAPTER 9
CONCL.SION AND S.++ESTIONS
This study aimed to construct an up"to"date consumption function for Bahawalnagar. The
:eynesians consumption function was the straight point and the works of ;odigliani and
Brumberg in B)6/.C and #riedman B)6/7C followed. It was then essential to consult more
recent literature on consumption in order to provide rational for variables that have really
come into play over the last few years, such as savings of the households.
The model with the independent variable household expenditures yielded a good fit as
shown by high 0 5@uare and gave good forecasting.
%iven more scope this study could be extended in a number of directions. It is clear that
there is negative relationship between household expenditures and savings of the
households. (s savings increases the household expenditures decreases with the same
ratio as savings increases. The same relation is between depression level of the
respondent and the household expenditures. 'hile the relationship between earning
assets of the respondents and household expenditures is positive that shows that if the
earning assets of the respondent increases the household expenditures also increases.
2ver all study shows that all the variables included in the model are significant for the
consumption function of the household in Bahawalnagar. By only considering the
statistical significant of a variable rather then its theoretical reason to be there has been an
interesting approach, and has allowed this study to highlight the statistical problems that
model can encounter.
(s the 5olow growth model suggests that consumption plays an important role in the
living standard of an individual or an economy. =igher consumption is a sign of higher
living standard. 5o, government can improve the living standard of the economy through
enhancing the consumption of the economy and for this it can take into place the
following pointsA
5avings of the household also have a significant impact on the expenditures as
study shows. (s savings increases consumption decreases. 5o, government should
take into account such factors that enhance the consumption and reduce the savings
for the sake of better living standard.
If earning assets of an individual or an economy increases then the consumption
also increases so, government should make such policies that enhance the earning
assets of the economy.
Re$eren0es!
(ndo (. and ;odigliani ,. B)61*C, IThe 8ife ycle =ypothesis of 5aving$ (ggregate
Implications and TestsI, American Economic Review !" B;archC$ !!#$%&
(oki :. Proudman J. and ?ileghe %. B+99+C, S=ouse as ollateral$ =as the link between
=ouse Prices and onsumption hangedT, Economic 'olicy Review, ?ol 4. B)C
)1*")74.
John J. B)61*C, SThe 'ealth Effect and onsumption$ ( 5tatistical In@uiryT, (ale
Economic Essays*$+/)G*9*.
Bain :. and =owells P. B+99*C, S;onetary Economics Policy and its theoretical BasisT,
BasingstokeA =ampshire Palgrave.
Barrot B. +991. SEmprical 5tudies in onsumption and =ouse PricesT, 'orking paper
64. -ational Institute of Economic 0esearch, 5tockholm.
(lan 5., and ,eaton (. B)64/C, IThe Time 5eries onsumption #unction
0evisitedI, Broo)ings 'apers on Economic Activity +.
Block J. B+99+C, ( ,ictionary of Economics +
nd
ed. 2xford. 2xford Fniversity Press.
Brooks . B+994C, Introductory Econometrics for #inance +
nd
ed. ambridge Fniversity
PressA ambridge.
arlin '. and 5oskice ,. B+99/C, S;acroeconomics Implications, Institutes > Policies.
2xfordT, 2xford Fniversity Press.
,eaton (. B+99/C, S#ranco ;odigliani and the 8ife ycle Theory of onsumptionT,
Princeton Fniversity.
,ougherty . B+99+C, SIntroduction to Econometrics +
nd
ed. 2xford Fniversity PressT,
2xford.
James 5. B)6.4C, SIncome"onsumption 0elations and Their ImplicationsI, 'ages !%*$+
in Income Employment an, 'u-lic 'olicy: Essays in .onor of Alvin ..
.ansen& -ew Eork$ -orton.
James 5. B)6.6C, 5Income, 5aving and the Theory of onsumer Behavior, .arvar,
Economic /tu,ies ?ol. 47. ambridge, ;ass.$ =arvard Fniv. Press.
Erik =. B)6/6C, SIdentity and the 8ife ycleT, Psychological Issues Monograph, )
B)C, )")7).
Paul P. B)644C, I(re onsumers 0icardianR Evidence for the Fnited 5tatesI, 0ournal of
'olitical Economy 61, no. /$ 64*")99..
;ichael J. B)6/6C, SThe -ew Theories of the onsumption #unctionT, Economic
0ournal 16$174G161.
#riedman ;. B)6/7C, S( Theory of the onsumption #unction. -ational Bureau of
Economic 0esearch, %eneral 5eries, -o. 1*. Princeton Fniv. Press #unction$ (n
Interpretation of ross"5ection ,ataI, 'ost#1eynesian Economics& -ew
Brunswick, -.J.$ 0utgers Fniversity Press.
=all 0. B)674C, S5tochastic Implications of the 8ife ycle Permanent Income =ypothesis$
Theory and EvidenceT, 2he 0ournal of 'olitical Economy 41, B1C pp. 67)"647.
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=ypothesis$ Theory and EvidenceI, 0ournal of 'olitical Economy 41, no. 1
B,ecemberC$ 67)"47.
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#unctionT Review of Economics an, /tatistics *9$+*6G+/4.
James F. and hyon"=wa E. B)667C, S,evelopment of onsumer Behavior Patterns
among hinese hildrenT, Journal of Consumer Marketing, ). B)C, ./"/7.
;odigliani #. and Brumberg 0. B)6/.C, SFtility (nalysis and the onsumption #unction$
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BeditorCT, 'ost 1eynesian Economics. -ew Brunswick, -.J.$ 0utgers Fniv. Press.
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?ereecken . et al. B)66/C, The relative influence of individual and contextual socio"
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Bahawalnagar Campus
,epartment of Economics
DETER,INANTS OF CONS.,PTION
A Co'para%ie Anal/sis o$ Various In0o'e Classes in Ba&a7alna4ar
Interview ,ate$ !!!!!!! 5erial no. $!!!!!!
,ear 0espondent,
'e are conducting a survey related to the topic of Determinants of Consumption: A
Comparative Analysis of Various Income Classes in Bahawalnagar& This would be
helpful to identify the core factors related to the consumption pattern among various
income classes in Bahawalnagar. ollected informative data will be used to develop a
research study. 'e need your full cooperation in this regard. 'e would be asking to you a
few @uestions and assure you that all information will be kept in secret. ,o not answer a
@uestion if you feel uncomfortable answering. Please be true in your responseU
In#ii#ual C&ara0%eris%i0s!
). -ame of 0espondent$ !!!!!!!!!!!!!!!!!!!!!!!!! B2ptionalC
+. (ge$ !!!!!!!! Eears
*. %ender$ ;ale L #emale
.. Education$ !!!!!!!!!!! Eears
/. 0eligious Education$ !!!!!!!!! Eears
1. Income$ 0s. !!!!!!!!!!!!!!!! P L ;
7. 5avings$ 0s. !!!!!!!!!!!!!!! P L ;
4. Personal Expenditures$ 0s. !!!!!!!!!!! P L ;
6. ;arital status$ ;arried L Fnmarried L Ever ;arried
)9. (re you suffering from any diseaseR Ees L -o
)). If yes, the no. of years of suffering$!!!!!! Eears
)+. Expenditure on ,iseaseR !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
House&ol# C&ara0%eris%i0s!
). =ousehold =ead $ !!!!!!!!!!!!!!!
+. =ousehold 8ocality$ 0ural L Frban
*. =ousehold 5i&e$!!!!!! members
.. #amily 5ystem$ Joint L -uclear
/. =ave you any part time 3obBsC or Business$ Ees L -o
1. If yes, then income from part time 3ob or business$ 0s.!!!!!!!!!!! P L ;
7. (ssets$ EesL-o
4. Earning (ssets$ EesL-o
6. Income from Earning (ssets$ 0s. !!!!!!!!!!!!!!!!!!!!!!!! PL ;
)9. Total household expenditures$ 0s. !!!!!!!!!!! P L ;
)). .=ousehold omposition$
;ale$ !!!!! #emale$ !!!!!! Employed$ !!!!!! Fnemployed$ !!!!!
(dult$ !!!!! 2ld age$ !!!!!! hildren$ !!!!!!!
Persons having permanent illness$ !!!!!!! Expenditure on illness$ !!!!!!! PL;
)+. -o. of dependents$ !!!!!!!!! members
)*. =ousehold (verage Education$ !!!!!!!!!!!!!!! Eears
).. Total income of =ousehold$ 0s. !!!!!!!!!!!!!! P L ;
)/. ,o you have following things in your home$ Electricity$ Ees L -o
%as$ Ees L -o 0efrigerator$ Ees L -o Telephone B88C$ Ees L -o
ar$ Ees L -o ;otor Bike$ Ees L -