The Macrolevel Factors of Household consumtion in somalia.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Household consumption, which is the total amount of money spent by people and households on
goods and services in the economy, makes up the greatest portion of an economy's aggregate
demand. Consumption spending is influenced by a number of variables, including interest rates,
debt, debt-to-population ratio, disposable income, and per capita income (SahadudheenI, 2012).
The amount of household spending reflects the overall state of economic system development.
This begs the question of what variables affect how much the average household spends in
various nations. In this regard, it is important to distinguish between exogenous factors, which
are governed by the status of the economy of a specific nation and of the global economy in
general, and demographic factors, which define the structure and composition of households.

The level of household consumption expenditures determines the overall growth of the economic
system. That brings up the question of what influences the level of household consumption in
diverse nations. In the global sense, household income, consumption, and wealth are considered
to be some of the most important macroeconomic determinants affecting household consumption
(Slesnick, 2000; Stiglitz, J.E., Sen, A., Fitoussi, J.P. 2009; Gerstberger and Yaneva, 2013). In
this way, both macroeconomics and microeconomics place a strong emphasis on the study of
consumption behavior.

For two reasons, macroeconomists are worried about total consumption. According to Ezeji,
aggregate saving is the portion of income that is not consumed and flows through the financial
system to produce the nation's supply of capital. Consequently, aggregate consumption first
determines aggregate saving.

(2015) Ezeji and Ajudua Therefore, an economy's long-term productive capacity is greatly
influenced by both aggregate consumption and saving behavior. Second, knowing the dynamics
of aggregate consumption expenditure is crucial for comprehending macroeconomic fluctuations
and the business cycle because it comprises the majority of national outputs (Gerstberger and
Yaneva, 2013). Consumption spending is taken into account in macroeconomic policies for fiscal
planning due to its substantial role in GDP. Policymakers make an effort to predict how
consumers will react to changes in income. Consumption phenomenon in the context of
consumers demand decision-making. In macroeconomics, the consumption function therefore
reveals relationships between behavioral factors.

Household final consumption expenditure, or private consumption, is the market value of all
goods and services, including durable goods (such vehicles, washing machines, and home
computers) bought by households as well as payments made to governments for licenses and
permits (World Bank, 2015).

Figure 1 shows household consumption in Somalia from 1960 to 2017 as a percentage of GDP.
The peaks and troughs of household consumption are shown in Figure 1. 1960 until 2017. With a
minimum of 66.98 percent in 1976 and a top of 135.82 percent in 2017, Somalia's average
percentage over that time was 95.08 percent.

The macro level variables, such as income, wealth, interest rate, capital gain, and liquid assets,
that have both quantitative and qualitative components and can affect consumption.

These studies may be illuminating, but their findings was largely based on macroeconomic
factors, which may be a sign of the macro level factors influencing household spending

Figure 1: Somalia Household Consumption, percent of GDP years between 1960-2017

s
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i
o
n

P
e (Source: World Bank)
r
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e Figure 1 shows household consumption in Somalia from 1960 to 2017 as a percentage of GDP.
n
The peaks and troughs of household consumption are shown in Figure 1. 1960 until 2017. With a
t
minimum of 66.98 percent in 1976 and a top of 135.82 percent in 2017, Somalia's average
o
f percentage over that time was 95.08 percent.

G The macro level variables, such as income, wealth, interest rate, capital gain, and liquid assets,
D
P that have both quantitative and qualitative components and can affect consumption.

These studies may be illuminating, but their findings was largely based on macroeconomic
factors, which may be a sign of the macro level factors influencing household spending

1.2Problem Statement

The percentage of household consumption spending is frequently utilized as a benchmark

indicator of welfare level. Analysis of the dynamics of household consumption expenditures has
revealed a significant shift during the current economic crisis. The final goal of economic
activity is typically understood to be household consumption, and the amount of consumption
per person is commonly used as a key indicator of how productively successful an economy is.
Consumption is thus one of the major macro-level factors that have an impact on citizens' well-
being on a global scale (Tschirley, & Weber, 1994).

For almost a millennium, economists have been interested in the macro-level factors that
influence household spending. In Somalia, imports account for the majority of household
spending, contributing to the country's balance of payments imbalance. Due to a lack of a
functioning monetary policy, Somalia experienced a lack of confidence in its own currency,
which led to the adoption of dollars rather than Somali shillings. This extreme devaluation and
instability of the currency resulted in the country's macroeconomic and financial vulnerability.
As a result, Somalia's household consumption appears to be lower than that of wealthy nations.

This study will focus and identify the variables that contribute toon household consumption in
Somalia and how the challenges facing consumption in Somalia can be overcome.

1.3 Objective of the Study

1.3.1 General objective

The general objective of the study is to estimate the effect of Macro level Factors on Household

consumption in Somalia.

1.3.2 Specific objective

 To find out the effect of Exchange rate on Household consumption

 To examine the effect of Inflation on Household consumption

 To determine the effect of Economic growth on Household consumption

1.4 R r esearch questions

 What is the effect of Exchange rate on Household consumption?

 How Inflation effects on Household consumption?

  What are the effects of Economic growth on Household consumption?

1.5 Scope of the Study

The scope of this study is the effect of Macro level Factors on Household consumption in

Somalia. Time series data of from 1960 up to 2016 will be used to measure the effect of Macro

level Factors and their impact in Somalia.

1.6 Significance of the Study

The findings of the study might help individuals who are keen on the factors that effecting

household consumption, their relationships, and how each factor determines household

consumption. Policy makers and practitioners particularly, monetary authorities in Somalia will

find this study appealing and interesting as they can get different bits of knowledge from the

study.

1.7 Organization of the Study

Study encompasses into five chapters structured as follows;

Chapter two reviews related to literature

Chapter three sets theoretical frame work and the model

Chapter four gives result and discussion

Chapter five will be summary, conclusion and policy implication

CHAPTER TWO

Literature Review

2.1 Introduction

This chapter will present some of the literatures relating to considering the effect of Macro level

Factors on Household consumption in Somalia.. These literatures have retrieved from various

books, articles, journals, studies and reports conducted on same issue at hand. The literature

specifically focused on the effective a study on the effect of Exchange rate, Inflation and

Economic growth on Household consumption in Somalia.

2.2Exchange Rate and Household Consumption

Varlamova and Larionova, (2015) macroeconomic and demographic effects of household

expenditures in OECD countries. The purpose of the study was to find out the demographic

factors, which determine household structure and composition.

Study applied multiple regression model to show that changes in imports compared with the

previous year (Import) and inflation rate (Consumer prices) are significant for household

spending and household final consumption expenditure. Short-term interest rates, general

government consumption expenditure, consume prices, tax on goods and services as share of
GDP, imports growth rate, household income were used as study variables. Data from World

Bank was used. Time series data was applied.

Study found that there is a strong statistical relationship between household expenditure and

macroeconomic indicators such as Study also found that level of income has a statistically

significant effect on expenditures. This suggests that for increasing of income level and quality

of life the right economic policies are needed. The analysis of the real sector has shown that

more developed economic environment positively affects the income of population. The most

significant characteristics are the indicators associated with economic development and

economic conditions.

Bonus and Muzindutsi, (2017) macroeconomic determinants of household consumption

expenditure in Ghana: A multivariate co-integration approach. The purpose of the study was to

find out the relationship between the real household consumption (RHC) expenditure and various

macroeconomic variables in Ghana.

The study applied multivariate counteraction approach to analyze the macroeconomic effects of

household consumption expenditure. The study also applied the vector autoregressive model and

Johansen counteraction approach to capture the short-and long-run relationships between

selected macroeconomic variables and the household consumption. The inflation rate, the real

exchange rate and real income were used as study variables. Time series data from 1961 to 2013

was applied.

Study found that income and inflation have a long-run effect on household spending in Ghana,

where about 79.71% of real income is spend on consumption. The short-run findings showed that

household spending in Ghana is mostly driven by changes in price level and it has a ripple effect

on real income and the real exchange rate. These findings imply that changes in household
spending patterns do not only affect economic growth or income, but also affect the Ghanaian

currency market. It is therefore concluded that change in price levels and inflation expectations

have both a short- and long-run effect on household consumption in Ghana.

Verter and Osakwe, (2014) a time series analysis of macroeconomic determinants of household

spending in the era of cross-cultural dynamics: Czech Republic as a case study. The purpose of

the study was to investigate selected macroeconomic variables that influence household spending

in the Czech Republic in the present era of evolving cross-cultural interactions.

The study applied Granger causality test based on a vector autoregressive (VAR) model to

provide evidence of a feedback relationship between household spending and social

globalization index.

Net disposal income, GDP per capita growth, inflation rate, cross cultural dynamics was used as

study variables. The data were sourced from online databases of Czech Statistical Office, World

Bank world development indicators, OECD, and ETH KOF Index of Globalization. Time series

data from 1993 to 2012 was applied.

The study found that net disposable income, cross-cultural dynamics, inflation rate, and

household saving rate have a significant relationship with household spending in the Czech

Republic within the period under study (1993–2012). In addition, the Granger causality analysis

also provides a positive relationship between household spending and social globalization index

(a proxy for cross-cultural dynamics). The results equally indicate bidirectional causality

between household saving rate and household spending as well as between the inflation rate and

household spending. On the contrary, there is a unidirectional Granger causality running from

household spending to both net disposable income and GDP per capita growth. Notwithstanding,
both disposable income and GDP per capita growth rate act as transmission channels to the

household spending through household savings rate.

Çağlayan, Astar, (2012) micro econometric Analysis of Household Consumption Expenditure

Determinants for both Rural and Urban Areas in Turkey. The purpose of the study was to

investigate the determinants of household consumption expenditure in Turkey.

Quantile regression is used to examine the correlates of consumption at different point on the

distribution for both rural and urban areas. Disposable income, household size, gender,

education, social security coverage, household type, property status, marital status, career

position of household was used as variables. Data gathered from Turkish Statistical Institute

(TurkStat) in 2009 is used. The data obtained from the household budget survey including 5658

sample households in the period January1-December 31, 2009.

Study found that the expenditures rise as the income increases. This increase is higher especially

at upper quantiles. While the consumption expenditures of the urban residents are nearly twice

higher than the ones of rural residents at lower quantiles, this over plus decreases at upper

quantiles. When the models are estimated separately for rural and urban areas, it is possible to

see the differences in the factors affecting consumption expenditures. In the estimates through all

observations regardless of rural-urban distinction, the lower value of consumption expenditures

of men than the consumption expenditures of women are rather close to the values obtained for

the same variables in the urban estimates. This result shows that rural areas do not have much

influence on the estimation of these variables. The results obtained from the urban estimations

are close to the results estimated through the use of all data.

Mignouna, T. Abdoulaye, A. Alene, V.M Manyoung, P.N Dontsop, J.H. Ainembabazi, and

R.Asiedu,(2015) micro econometric analysis of household consumption expenditure

determinants in Yam growing areas of Nigeria and Ghana. The purpose of the study was to

analyze the microeconomic factors that explain household consumption expenditure in rural

areas.

Study applied ordinary least squares (OLS) and a quantile regression (QR) approach for a more

comprehensive picture at different points of the distribution. Gender, marital status, occupation

of the household head, age, education, household size, membership of formal and in formal

institutions, family structure, and farm size were used as study variable. Cross-sectional data

obtained from 1,400 randomly selected yam producing households of Nigeria and Ghana was

applied.

Study found that farm household expenditure increases with education at all points examined on

the conditional distribution for both countries. This suggests that the more educated household

heads are, the higher their household expenditure compared to their less educated counterparts.

A.Eshghi and W.Lesch (1993) demographic and life style determinants of household

consumption patterns in U.S. The purpose of the study was to investigate household

consumption patterns and their implications to women's increasing participation in the

workforce.

Study applied structural-equation model to analyze the relationship between measured variables

and latent constructs. Socioeconomic variables measured at respondent (marital status, age,

education) and household (occupation, income, and family size) were used as study variables.

Survey data made available by the Leo Burnett Advertising Agency in 1979 was used.

Study found that certain life style constructs such as moral values, religiosity, child orientation,

anxiety, and style consciousness expressed strong predictive validity in the explanation of
consumption patterns. Among the socioeconomic-demographic variables, age, marital status,

occupation and income, emerged as significant.

2.3 Inflation and Household Consumption

Danlami (2017) determinants of household electricity consumption in Bauchi state, Nigeria. The

purpose of the study was to assess the factors that influences the amount of household

consumption of electricity.

The study applied OLS regression model to examine the impact of the household’s socio-

economic and demographic characteristics on their electricity use and consumption. Home

appliances, price of other fuel, marital status, gender of the household head, level of education,

household size, location, home size, and number of rooms were used as study variables. Data

collection for this study, a total of 750 questionnaires were distributed 548 filled questionnaires

were returned back, which is more than 70% of the total number of the issued questionnaires.

The study found that level of education of the household head, living in the urban areas of

Bauchi State, price of firewood and number of energy use devices at home, have positive

significant impact on the household use of electricity. On the other hand, marital status was

found to have a negative impact on the electricity expenditure, the households that are headed by

a married person have less expenditure on electricity than otherwise.

Huang, (2015) the determinants of household electricity consumption in Taiwan: evidence from

quantile regression. The purpose of the study was to analyze the determinants of household

electricity consumption in Taiwan

The study applied quantile regression estimates the effects of predictor variables on specific

quantiles of a dependent variable. Age, gender, education, household size, the number of elderly
members, the number of workers and household income, geographic variables were used as

study variables. Time series data from 1981 to 2011 was applied.

Study found that household income and household size were significant in all quantiles for each

year. Households with higher income, larger household size, and more elderly members

consumed more electricity. In terms of dwelling attributes, larger housing areas, homes with

more appliances, and owner-occupied, business-used, and multi-floor houses contributed to

higher household electricity consumption. Study also found that the low-income and small-size

households may have higher electricity consumption on a per capita basis. Thus, as household

size decreased, the increase of per capita electricity demand driven by the change of household

size should be a matter of concern.

Tewathia, (2014) determinants of the household electricity consumption: a case study of Delhi.

The purpose of the study was to find out the monthly average household electricity consumption

and seasonal variations in this consumption for the months of summer, winter and moderate

weather.

The study applied multiple regression models to describe the pattern of household electricity

consumption. Household income, stock of electrical appliance (SA), use of appliances (UA),

family size (FS), house size (HS), time spent outside home by the family members (TO) and

household awareness (AW), and place/location of residence (L) were used as study variables.

Data collected by questionnaire based study of 395 Delhi households selected via stratified

random sampling technique.

The study found that the stock of appliances in a household contributes the most to the variation

in the dependent variable. An inverted U-shaped Non-linear Temperature- Electricity Curve has

been derived from the primary data used in the study.

T.Ekholm, V.Krey, S.Pachauri, and K.Riahi, (2010) determinants of household energy

consumption in India. The purpose of the study was to present a new generic modeling approach,

with a focus on cooking fuel choices, and explores response strategies for energy poverty

eradication in India.

Study applied a household energy choice model to develop alternate future scenarios that explore

how different policy mechanisms such as fuel subsidies and micro financing can enhance the

diffusion of modern, more efficient, energy sources. Prices, technological parameters, discount

rates, and Inconvenience costs were used as study variables. Data based on a large consumer

survey, carried out by National Sample Survey Organization (NSSO) of India. Data from 1999 to

2000 was applied.

The study found that economic development and the adoption of modern cooking fuels are very

likely to go hand in hand and it is hard to imagine improving one without improving the other.

Tschirley and Weber, (1994) food security strategies under extremely adverse conditions: the

determinants of household income and consumption in rural Mozambique. The purpose of the

study is to examine the factors associated with higher incomes and improved rural household

food security.

Household structure, purchase and sale of labor, land areas and cropping patterns, were used as

study variables. Data collected by collaboration with Mozambican team members and the

University of Arizona. Department of Agricultural Economics and Bureau for Applied Research

in Anthropology. Data from a survey of 343 smallholders in northern Mozambique was used.

Study found that incomes are low and flexible in each district, and highly correlated with land

holdings. Calorie consumption is also low and quite variable, with many families in each district
not achieving even 80% of caloric requirements. Calorie consumption, like income, was also

found to be strongly dependent on land holdings. Relatively land rich households nearly all reach

at least 80% of caloric requirements, while most land poor households do not. Study also found

that the size and quality of land holdings will remain very important in determining the welfare

of most rural households for the foreseeable future. Thus, improving the technological and

management packages available to smallholders to increase food and cash crop yields is of key

importance.

2.4 GDP and Household Consumption

Musgrove, (2018) determinants of urban household consumption in Latin America: a summary

of evidence from the ECIEL surveys. The purpose of the study was to find out the factors that

determine how income is allocated between consumption and saving,

The study applied logarithmic current income model, which specifically allows for nonlinear and

non-proportional effect. Employment of household members, Household size and composition,

Age and life cycle were used as study variables. Data was collected by survey for 10 cities in

five Andean countries (Colombia, Chile, Ecuador, Peru, and Venezuela) collected in 1966-69

and analyzed during 1971-75

The study found that consumption clearly increases as there are more adults in the house-hold,

each additional adult raising total spending by an average of 3%- 6%. Additional children add

only between 1% and 2% each to total expenditure, on average. Consistent with this pattern,

spending tends to rise until a household includes adolescent children and thereafter decline.

Surprisingly, elderly households show relatively low propensities to consume rather than

dissaving. The total variation over the life cycle is, however, only some 6%-10%: most of the

variation in expenditure with age comes from changing income, as individual remunerations rise
and as the number of members working varies. These findings hold equally well for current

income and for permanent or normal income.

Gounder, (2012) the determinants of household consumption and poverty in Fiji. The purpose of

the study was to find out what factors determine household consumption and poverty in Fiji.

The study applied multivariate analysis to ascertain those household characteristics that correlate

with household welfare and poverty. Education of the household head, rural or urban area, age of

household head, sex of the household head, electricity, and marital status were used as study

variables. Data was collected from a survey that was conducted continuously for one year from

March 2002 to February 2003.

The study found out that education, demographics, and location have emerged as important

determinants of household consumption and poverty. These results have important policy

implications for design and implementation of poverty reduction policies. For instance,

education and training of the labor force should be a key priority area in the struggle against

poverty. The findings thus support efforts to increase the provision of quality education and

reducing dropout rate of students from schools. Second, in addition to rural infrastructure, the

government must also enhance the employment and livelihood opportunities in the rural sector.

Also, geographical targeting could be a useful policy as income diversity exists within the

country.

Chamon, S. Prasad, (2005) determinants of household saving in china. The purpose of the study

was to focus on the determinants of household saving.

Cohort analysis were used to indicate the behavioral analytics that takes place from 1990-2005.

Income variables include labor income, property income, transfers (both social and private,

including gifts), and income from household sideline production. Consumption expenditures,
demographic, employment of household members and age, were used as study variables. Micro

data from the Urban Household Surveys (conducted annually by China’s National Bureau of

Statistics) were used. Time series data from 1990-2005 was applied.

Study found that household saving rate (relative to disposable income) has increased gradually

over this period although the share of household savings in national savings has stagnated.

Estimates of the age profile of savings show that young households tend to have relatively high

saving rates, possibly in order to build a buffer stock of savings and to self-finance purchases of

major durables. Saving rates then decline with the age of the household head until around age 45,

when they begin to bounce back sharply; saving rates remain at high levels for older workers.

Cohort analysis indicates that older working-age cohorts, who are likely to be most affected by

market-oriented reforms, tend to have the highest saving rates.

lindqvist, (1981) a note on determinants of household saving behavior in 429 randomly selected

households, four different saving estimates, namely reported bank savings, repayments of debts,

total savings and a liquidity estimate are computed and analyzed separately. The purpose of the

study was to develop and test short and long-run predictors of household’s saving.

A micro approach is applied where households are studied and other indicators besides the

traditional economic ones are anticipated to influence saving behavior. As a first step in the

attempt to assess causal factors influencing saving. Household income, family life cycle,

educational level, residence, attitudes, expectations, economic activities and economic

satisfaction were used as study variables. Cross-sectional interview data from 429 randomly

selected households were used.

Study found that the explanatory value of the set of predictors is small. Only a few, and different

predictors are related to the four saving estimates used in the study. It also found out that both
traditional economic and intervening variables seem to influence the household’s saving

behavior. This is further indicated by the path analysis. Thus the results indicate that the different

categories of saving ought to be studied separately when trying to explain household saving

behavior since different phenomena may be involved.

N.Herris, J.Loundes and E.Webster, (2002) determinants of household saving in Australia. The

purpose of the study was to find out that demographic and householders level of economic

optimism play a key role.

An ordered prohibit estimation method was used to support the view that current incomes are

perhaps the most important determinant of saving. Household income, age, rate of interest,

number of children, and area of residence. Data collected from 17585 survey of consumers to

test several separate but inter-related hypothesis of household saving were used.

Study found that the analysis of Australian household saving data sport the general consensus of

variety of macroeconomic studies available on saving. Particularly income and wealth are

positively and significantly related to the propensity for household to save, and the level of

interest rate has little or no influence. Study also clearly indicate that other factors play an

important role in saving at the level of household. Up to the age of 35, respondents save more

than those over the age of 65. However once specific age of life cycle is reached, the level of

income earned outweighs the life cycle effect. That’s conditioning on income, respondents aged

35 to 44 and 55 to 64 are actually saving less than respondents over the age of 65. The result of

on measure of optimism is particular interesting finding. The results suggest that individuals who

are pessimistic in their outlook are likely to save more to account for an uncertain future.
 CHAPTER THREE

Theoretical Framework and Methodology

3.1 Introduction

This is the third chapter of the study of the effect of Macro level Factors on Household

consumption in Somalia. The first section of the study will cover the theoretical framework

starting with the definition of the study constructs. The structural theory of household

consumption is in section 2. The third section covers description of the study’s data. Last section

will give the model specification.

3.2. Theoretical frame work

3.2.1. Definition

Household consumption: is the amount of final consumption expenditure made by resident

households to meet their everyday needs, such as: food, clothing, housing (rent), energy,

transport, durable goods (notably, cars), health costs, leisure, and miscellaneous services.
It is typically around 60% of gross domestic product (GDP) and is therefore an essential variable

for economic analysis of demand (OECD, 2018).

Household consumption: consumer spending is another term for voluntary private household

consumption, or the exchange of monetary for goods and services in an economy. Contemporary

measures of consumer spending include all private purchases of durable goods, nondurable

goods and services (investopedia, 2018).

Study adopts definition of (OECD, 2018) as operational definitions of the study.

3.2.2 Demand theory

The demand theory is a principle relating to the relationship between consumer demand for

goods and services and their prices. This theory was first discovered by John Locke in his 1691

publication, Locke did not actually use the term "demand," however. Its first appearance in print

came in 1767, with Sir James Steuart. In 1776 Adam Smith explained the concept of supply and

demand as an "invisible hand" that naturally guides the economy. After Smith, Alfred Marshall

(1890) developed a demand curve that is still used to demonstrate the point at which the market

is in equilibrium.

The law of demand states that the higher the price of any commodity, the smaller the quantity of

such commodity that is purchased and the lower the price, the higher the quantity demanded

(Tawiah, 2000). Law of demand describes consumer choice behavior when the price

changes. However, it is not only price that effect the quantity of demand for a commodity but

also there are non-price determinants of demand such as; income of the consumer, taste and

preferences, number of consumers, and the availability of substitutes.

A few studies used demand theory to establish a relationship between some factors and the

quantity of household demand. These studies incorporate Couture, Garcia, and Reynaud (2012)

and Lee (2013) and Song, Arguilar, Shifley, Goerndt (2012).

3.2.2.1 Structural Demand Theory

Q x =F ( P X , Y , P S , PC , T , N )……………………………………….…….………….. (1)

Where:

𝑄x= quantity demanded

Px= price of good X

Y = income

Ps = price of substitute

Pc = price of complement

T = preferences

N = number of consumers

γ i=β 0 + β i x i +ε i …………………...…………………………………………….. (2)

𝑖 = 1, 2…, 𝑛

𝑌i = Quantity of household consumption

𝛽i = Coefficients

𝑋i = various independent variables which can be in form of continuous or dummy

𝑢i = Unobserved error term

On ceteris paribus basis, other variables (determinants) can be held unchanged to observe the

impact that a particular variable exacts on the quantity of household consumption.

The main objective of this study is to assess the determinants of household consumption. In this

case, OLS regression model was employed to estimate the determinants of household

consumption. OLS model showing the relationship between dependent and independent

variables can be expressed as:

γ i=β 0 + β 1 x 1 + β 2 x 2+ …+ β k x k + ε k …………..………...…….. (3)

The dependent variable Y and the independent variables (X 1, X2, X3…, Xn) are perceptible

irregular scalars, i.e. they can be observed in a random sample of the population. U is non-

observable random error and β0, β1, β2..., βk are the various parameters to be estimated.

3.3 Data Description

The main source of data in this study is World Bank, World development indicators. Selected

country is Somalia. Unbalanced Time Series Data covering the period between 1970 to 2014 is

used to measure determinants of household consumption.

The dependent variable of the study is household consumption while the inflation rate, the real

exchange rate and real income is explanatory variable.

3.4Model specification

Model is specified by using equation (3) which measured production. Model is specified as

follows:
ln ( γ t )=β 1 + β 2 ln ( GDP t ) + β 3 ln ( INFt ) + β 4 ln ( ERt )+ ε t ……...…………………..…. (4)

Where Y is Household consumption, GDP stands for Gross domestic product, INFis Inflation,

RER is Real Exchange Rate, and U is the error term.

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