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Final consumption expenditure in Albania
Relationship of final consumption expenditure with GDP per capita,
gross savings and net taxes on product. (1985-2013)
Rovena Leka
Abstract
The purpose of this paper is to investigate the relationship of GDP per capita, gross saving and
net taxes on final consumption expenditure in Albania, how those factors have effect on final
consumption expenditure. To test the relationship is needed a statistical analysis to determine
how these variables affect the overall consumption of Albania gathering data from 1985-2013.
Objective of this study are to identify the effect of GDP per capita, gross saving and net taxes on
final expenditure consumption and to assess the relationship of GDP per capita, gross saving and
net taxes of final expenditure consumption using econometric analysis. From the analysis of
econometric is defined that there is a positive relationship between GDP per capita and final
consumption expenditure, the dependent variable. It has a negative relationship between gross
savings and final consumption expenditure. It has a positive relationship between net taxes on
products and final consumption expenditure.
Key words: GDP per capita, gross savings, net tax, final consumption expenditure.
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Table of Contents
Abstract ......................................................................................................................................................... 2
Introduction ................................................................................................................................................... 4
Methodology ................................................................................................................................................. 5
Literature Review.......................................................................................................................................... 6
1.
Theoretical essential.............................................................................................................................. 7
1.1 Definition of Household final consumption expenditure ................................................................... 7
1.2 Definition and calculation GDP per capita .......................................................................................... 8
1.3 Savings............................................................................................................................................... 10
1.4 Net taxes on products ....................................................................................................................... 11
2.
Regression Analysis ............................................................................................................................ 12
3.
Conclusion .......................................................................................................................................... 15
4.
Bibliography ........................................................................................................................................ 16
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Introduction
The most common measure of the amount of stuff produced in the whole economy is termed
Gross Domestic Product (GDP). “GDP is total currency value of all final goods and services
produced in an economy over some time period /year.”1 Consumption is basic economic activity
that individuals encounter in their everyday lives. Goods and services are consumed daily to
meet needs and wants of people. Expenditure on consumption contributes as a portion of the
Gross Domestic Product that is also known as the income of the country. Consumption is
established to be very influential in evaluating the growth of a country; also consumption is a
function of national income. The purpose of this paper is to investigate the effect of GDP per
capita, gross saving and net taxes on final expenditure consumption and to assess the relationship
of GDP per capita, gross saving and net taxes of final expenditure consumption using
econometric analysis. The organization of this paper is made by three parts. First part represent
an introduction of factors how they are in Albania and their effect in final consumption, second
part shows data and methodology used for this paper and the third part present the econometric
analysis result how the variables have indicated in final consumption expenditure in Albania
from 1985 to 2013. From the analysis of econometric is defined that there is a positive
relationship between GDP per capita and final consumption expenditure, the dependent variable.
It has a negative relationship between gross savings and final consumption expenditure. It has a
positive relationship between net taxes on products and final consumption expenditure.
1
Investopedia
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Methodology
This study is designed to appraise the fundamental economic relationship between Gross
Domestic Product and Final Consumption Expenditure of Albania using time series data from
year 1985-2013. The data includes Final Consumption Expenditure, GDP per capita, Gross
Saving and Net Tax on goods. All the variables are measured in same units in current US $. The
hypothesis to be tested is the expectations and the relationship of each independent variable on
the dependent variable. The study employed regression analysis to verify the relationship
between Gross Domestic Product per capita and final consumption expenditure in Albania.
This study may be supported by several theories about consumption proposed by different
economists. John Maynard Keynes published General Theory in 1936 based on book of Mankiw
(2010). John Maynard Keynes considered the consumption function as the single reason for
fluctuations happening in the economy. Keynes suggested that an individual's marginal
propensity to consume (MPC) is between zero and one. He explained that men are supposed to
increase their consumption as their income increases, but not as much as the increase in their
income. Also, Keynes proposed that average propensity to consume (APC) falls as income
arises. This means that rich people are expected to save more than poor people that have less
income. Keynes function of consumption is written as follows:
_
_
C = C + cY
C >0, 0 <c<1
C is consumption; Y is disposable income, C is a constant and c is marginal propensity to
consume. When consumer spend they also take into consideration how much to save. The more
they spend today, the less they will spend in the future. Consumption differs over people’s lives
by considering a country’s income or GDP. Having gross savings let the country to have more
income.
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Literature Review
According to a study made by (Nakagawa, 1999) that analyze the importance of the different
types of uncertainty on the household saving rate in the Japan according to the age and incomes.
This paper include that income risk is important for the low to middle income. Also it suggest
that stagnation of household disposable income and the decline in household wealth have been
the main causes of the stagnation of household consumption during the 1990s and early 2000s in
Japan and increased uncertainty about the future does not affect a major cause of the stagnation
of household consumption.
Another study is made by (HORIOKA, 2003) concerning with the Stagnation of Household Final
Consumption Expenditure in case of Japan during the 1990s and the early 2000s. Stagnation of
household disposable income was a major cause of the stagnation of household consumption and
that it has caused household consumption to be more stagnant, stagnation of household
consumption during this period was due at least partly to the decline in household wealth,
another result was that uncertainty does not effect on the stagnation of household consumption.
Also reduced in future prospect effects in consumption because increased in employment
decreased in consumption. Another paper which continues with household consumption and
GDP is (UYGUR, 1994) aimed to develop an instrument to predict household disposable income
and consumption expenditure by household composition asset ownership and other human capita
variables.
(SVENNEBYE, 2008), studied the period from 2005 to 2007. It is focus on results of
gross domestic product, GDP per capita in the 27 EU member states and looks at the level of
actual individual consumption per capita and at countries comparative price levels. Luxembourg
stands out with a GDP per capita far above any other of the countries covered. This is to a
significant extent due to a particular property of the country’s economy: Luxembourg has a large
number of cross-border workers relative to its resident population. While they contribute
substantially to GDP, these workers are not included in the population figure used to calculate
GDP per capita. This does not mean that the figure for Luxembourg is wrong, but it does indicate
that GDP per capita cannot be used uncritically as an accurate indicator of, for instance,
residents' material living standards. Other Member States with a high GDP per capita, 20 percent
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or more above the EU overall level, are Ireland, the Netherlands, Austria, Sweden and Denmark.
The case of Ireland is particularly interesting, because comparable statistics from a few years
back used to indicate that the country had a lower GDP per capita than most of the other, old EU
Member States. The positive development for Ireland continues throughout the years 20052007. However, because many companies resident in Ireland are foreign-owned, it is not
surprising that Ireland's consumption per capita is far more in line with other EU Member States
than its GDP per capita.
1. Theoretical essential
In this part will be explain some of the basic theoretical essential which this study is based. The
largest component of final uses of GDP is Household final consumption which in general around
60% of GDP. It is an essential variable for economic analysis of demand.
1.1 Definition of Household final consumption expenditure
“Household final consumption expenditure covers all purchases made by resident households
(home or abroad) to meet their everyday needs: food, clothing, housing services (rents), energy,
transport, durable goods (notably cars), spending on health.”
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there are not included buying
residence.
Household’s final consumption expenditure is formed as follow:
+ purchases of consumption goods and services
+ own products (agricultural, gardening and collected products)
+ imputed dwelling income from an owner-occupied dwelling and a dwelling provided as a
benefit in kind
+ goods and services received
+ current transfers comparable to consumption (e.g. church tax and labour union membership
fees and interest on consumption loans)
2
OECDi Library
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= total consumption expenditure
Consumption is made up of the goods and services bought by households. It includes three
subcategories that are: nondurable goods, durable goods and services. First subcategory includes
food, clothing and goods that temporarily exist. In durable goods are involved cars and
computers, goods last longer. In third subcategories, services are involved haircuts, dentist visit
and spas.
1.2 Definition and calculation GDP per capita
Gross domestic product is a macroeconomic measure of output. This measure helps when a
country is more or less productive and in turn whether it is headed for a recession or a bull
market. The GDP per capita measure of GDP indicates whether the country's workforce is
generally becoming more or less productive that is, whether the country's workforce is efficiently
producing goods and services that consumers want. In this study is used derivation of the GDP
which is the GDP per capita. Gross domestic product show the market value of final goods and
services produced within a country in a given period. It is one of the main indicators for the
standard of living also GDP is related to national accounts.
𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 =
GDP
Total number of population
Where:
GDP represent gross domestic product of a country
Total number of population is all population of a country
GDP per capita is a very reliable indicator of a country's performance. According to Madsen
when GDP per capita increase the economy of a country will grow. GDP per capita serves as a
monitor in the development of the economy through time. Decrease in GDP per capita means a
decline in the economy.
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Figure 1 GDP per capita, current price US$
As is seen in the graph the latest value of GDP per capita in Albania was 4,781.23 US $ in 2014.
Over the years this value has fluctuated between 819.25 US $ in 1985 to 4,781.23 US $ in 2014.
Assuming that different exogenous factors have an impact on GDP per capita growth in Albania,
we can express the subsequent model:
Ec Gr Rate=β0 + β1 pop Tot + β2 G pop Urb + β3 B Rate + ε
Ec Gr Rate = economic growth rate (based on GDP per capita)
pop Tot = annual average growth rate of total population in Albania
G pop Urb = annual average growth rate of urban population
B Rate = number of live births per 1000 habitants in Albania
From this formula we can say that increase in population will increase participation in work
force so the coefficient of population growth will have a positive sign. Fertility decline leads to
improving the health of children by consumption and by education. So that the birth rate
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coefficient will have a positive sign. Also, the higher the rate of urban growth and the level of
urbanization, the higher the per capita GDP growth rate would be. Urbanization in Albania was
done without proper planning, and this leads to reduced quality of life. Because urban population
growth becomes uncontrolled it slows economic growth. So the coefficient of the growth rate of
urban population will have a negative sign for Albania.
1.3 Savings
In the world that we live today can be found significant differences in saving rate between
countries. This difference is rising not only between poor and rich countries but even between
rich countries. According to Keynesian saving is the amount left over when the cost of a person's
consumer expenditure is subtracted from the amount of disposable income that he or she earns in
a given a period of time. Gross savings are calculated as gross national income less total
consumption plus net transfers.
Figure 2 Gross Saving in Albania from 1985-2014 (% of GDP)
Source: www.opendataforafrica.org
As is seen from the graph gross saving in Albania fluctuates every year but comparing with the
year 1985 it is decreased by 10%. Albanian families who have lower incomes and older
households increase saving rates because of low income that they receive. As shown in the graph
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since 2010 saving rates are increasing this because unemployment is increasing, unemployment
is in proportional with the savings rate, increased unemployment leads to increasing the rate of
saving. But by comparing Albania to Japan, the Japanese have the highest rate of savings with
any other country.
1.4 Net taxes on products
Net taxes on products (net indirect taxes) are the sum of product taxes less subsidies. Product
taxes are those taxes payable by producers that relate to the production, sale, purchase of the
goods and services. Subsidies are grants on the current account made by general government to
private enterprises and unincorporated public enterprises. The grant may take the form of
payments to ensure a guaranteed price or to enable maintenance of prices of goods and services
below cost of production and other forms of assistance to producers.
Figure 3 Net taxes on products (US$)
http://www.tradingeconomics.com
Net taxes on products in Albania were last measured at 61787000000 in 2013, according to the
World Bank. Figure shows that net tax has been rising from 1995 to 2013. Albania is country
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that has less tax on product comparing with the other countries, US remains higher than other
countries in net tax on products.
2. Regression Analysis
In Appendix are data for final consumption expenditure, GDP per capita, Gross Savings and Net
taxes on products, all are in US$ from 1985-2013.
Dependent variable: Final Consumption Expenditure, it measures the market value of all goods
and services, it is in US$.
Independent variable:
o GDP per capita-is a quantitative variable measured by getting the total
output of the
country, GDP, divided by the population of the country, measured in US$.
o Gross Savings, is a quantitative variable that is calculated as GDP less Final
Consumption Expenditure.
o Net Taxes on Products, are the sum of product taxes less subsidies. Product taxes are
those taxes payable by producers that relate to the production, sale, purchase of the goods
and services.
Since there are three independent variables and one dependent variable, the model is a
multiple regression model. The model will be estimated with the given equation:
y= 591528720.65 + 1879288.49(x1)-0.63(x2) + 2.64(x3)
P value indicates if the independent variable is significant enough to influence the dependent
variable and this will be explain below.
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Intercept
Table 1 Regression Analysis for coefficients of correlation
Regression Statistics
Multiple R
0.997124635
R Square
0.994257538
Adjusted R Square
0.993568443
Standard Error
320282065.6
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Observations
R squared measures the goodness a fit of the model. The nearer it is to 1 the better it is. R Square
= 0.9942 this means that these three variables explain 99% of the variation in the dependent
variable that is final consumer expenditure.
Table 2 Data of Regression Analysis for Residual and Regression
ANOVA
df
Regression
Residual
Total
SS
MS
F
4.44024E+20 1.48008E+20 1442.844529
2.56452E+18 1.02581E+17
4.46588E+20
3
25
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Significance
F
3.99E-28
Our degrees of freedom are k=3
P value is = 3.99E-28
Table 3 Data of Regression Analysis of coefficients X1, X2 and X3
Coefficients
591528720.7
Standard
Error
114837437.4
t Stat
5.151009412
P-value
2.52277E-05
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Lower 95%
355016593.1
Upper 95%
828040848.2
Lower
95.0%
3.55E+08
Upper
95.0%
8.28E+08
X1
Variable(GDP
per capita)
X2 Variable
(Gros Savings)
X3 Variable
(Net taxes on
products)
1879288.497
0.632955829
2.643661448
459555.815
0.000393725
0.391367834
4.089358539
1.617291392
2825761.407
932815.6
2825761
0.118365245
932815.5862
1.438992964
0.173081306
-1.43899
0.173081
0.757191463
3.491404193
0.001803957
1.084196452
4.203126445
1.084196
4.203126
From the coefficients we can see that there is a positive relationship between GDP per capita and
final consumption expenditure, the dependent variable. For each unit increase in GDP per capita
there is an increase in final consumption expenditure by 1879288 units. It has a negative
relationship between gross savings and final consumption expenditure, for each unit increase in
gross savings there is a decrease in final consumption expenditure by 0.6 units, as increase in
saving leads to decline in final consumption expenditure. It has a positive relationship between
net taxes on products and final consumption expenditure. For each unit increase in net taxes there
is an increase in final cons expenditure by 2.6 units.
In order for us to accept that there is a relationship between the dependent variable and the
independent variable we need to see the P values for each variable. The P-value has to be lower
than 0.025 for each variable. GDP per capita P value= 0.000393725 that is smaller than 0.025 so
the relation is significant. For gross savings P value=0.118365245 and that is not lower than
0.025 se we cannot say that the relationship is significant. In the third case the P value for net
taxes is 0.001803957 in this case it is lower than 0.025 se the relationship is significant.
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3. Conclusion
Expenditure on consumption contributes as a portion of the Gross Domestic Product that is also
known as the income of the country. Consumption is established to be very influential in
evaluating the growth of a country; also consumption is a function of national income.
The aim of this paper was to define how GDP per capita, gross savings and net taxes affect an
important economic factor as final consumption expenditure. To test the relationship is needed a
statistical analysis to determine how these variables affect the overall consumption of Albania
gathering data from 1985-2014. Model represent three independent variables: GDP per capita,
gross savings and net taxes on product and one dependent variable which is final consumption
expenditure. Paper shows how certain economic activities have e impact in hoe a country spends
for final consumption. Regression indicates that with the increase of GDP per capita and net
taxes on product results to increase on final consumption expenditure. For each unit increase in
GDP per capita there is an increase in final consumption expenditure by 1879288 units. It has a
negative relationship between gross savings and final consumption expenditure, for each unit
increase in gross savings there is a decrease in final consumption expenditure by 0.6 units, as
increase in saving leads to decline in final consumption expenditure. It has a positive relationship
between net taxes on products and final consumption expenditure. For each unit increase in net
taxes there is an increase in final cons expenditure by 2.6 units
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4. Bibliography
(n.d.). Retrieved from
file:///C:/Users/HP/Downloads/NationalAccountsIncomeExpenditureYeMar14correctedHOTP.pdf
World Bank.
Christine Gerstberger, Daniela Yaneva . (2013, February). EUROSTAT. Retrieved from
http://ec.europa.eu/eurostat/documents/3433488/5585636/KS-SF-13-002-EN.PDF/a4a1ed61-bac74361-a3f0-4252140e1751?version=1.0
EUROSTAT. ( 2015, June ). Retrieved from http://ec.europa.eu/eurostat/statisticsexplained/index.php/GDP_per_capita,_consumption_per_capita_and_price_level_indices
Galor. O and Zeira. J. (n.d.). Income Distribution and Macroeconomics. "Review of Economic Studies" .
HORIOKA, C. Y. (2003). THE STAGNATION OF HOUSEHOLD CONSUMPTION IN JAPAN.
Lars Osberg, Andrew Sharpe. (n.d.). Comparisons of Trends in GDP and Economic Well-being the Impact
of Social Capital. Retrieved from http://www.oecd.org/innovation/research/1824740.pdf
Nakagawa, S. (1999). Why Has Japan’s Household Savings Rate Remained High even during the 1990s?
Shenzhen. (2011, April 25). International Workshop on Measuring GDP by Final Demand Approach . "
Measurement of GDP by final expenditure approach" .
SVENNEBYE, L. (2008). GDP per capita, consumption per capita and comparative price levels in Europe .
UYGUR, S. (1994). Econometric Models for Household Disposable Income & Consumption Expenditure for
Selected 7 Province Centers in Turkey.
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