ANALYSIS OF REAL INCOME ON HOUSEHOLD CONSUMPTION: CASE STUDY

OF KENYA

BY

ORINA RICHARD ONDIGO

K14/5668/2011

A RESEARCH PAPER SUBMITTED TO THE SCHOOL OF ECONOMICS IN

PARTIAL FULLFILMENT OF THE AWARD OF THE UNDERGRATUATE

BACHELORS DEGREE IN ECONOMICS IN KENYATTA UNIVERSITY

SUPERVISOR: MR.MWAURA

30TH MARCH ,2015

DECLARATION

I the undersigned do declare that this is my own work and has never been presented for a degree award in any university .All information from other sources are dully cited and acknowledged .I accept to take full responsibility of errors of omission ,commission and principle should they be found therein.

Signature………………………………………..Date………………………………..

ORINA RICHARD ONDIGO BA.ECON

K14/5668/2011

I confirm that the work reported in this thesis was carried out by the student under my

supervision.

Signature………………………………………..Date………………………………..

Dr…………………………………………………………………………………………………

Department of Applied Economics

School of Economics

i

DEDICATION

I dedicate this work of my hands to my dear mum Monicah ,my sisters and brothers especially

my immediate brother Evans ,uncle Henry, aunt Naomi for their sacrifice and commitment to

ensure that the research was done authentically and professionally without forgetting my

supervisor Dr. Mwiraria. You are highly appreciated.

ii

ACKNOWLEDGEMENT

My warmest gratitude goes to the almighty God for His knowledge and wisdom He bestowed in

me and guidance. I wish also to express my profound thanks to my supervisor Dr .Mwiraria all

the staff of the school of Economics. I profoundly appreciate Dr. Njaramba for her immense

support and advice. My sincere gratitude also goes to my mum Monicah for her input and critical

review of my work made this write up a success. My thanks also goes to my brother Evans for

editing this work and making sure it’s presentable. Finally special thanks to my family, my

relatives and friends for their support and encouragement during this write up. May God bless

you all.

iii

Table of ContentsDECLARATION..........................................................................................................................i

DEDICATION.............................................................................................................................ii

ACKNOWLEDGEMENT..........................................................................................................iii

TABLE OF CONTENTS...........................................................Error! Bookmark not defined.

LIST OF FIGURES....................................................................................................................vi

LIST OF TABLES.....................................................................................................................vii

Table 3.1 Model specification table...........................................................................................vii

OPERATIONAL DEFINATION OF TERMS.........................................................................viii

ABSTRACT.................................................................................................................................x

CHAPTER ONE..........................................................................................................................1

1.0 INTRODUCTION.................................................................................................................1

1.1BACKGROUND OF THE STUDY.......................................................................................1

1.2 STATEMENT OF THE PROBLEM.....................................................................................1

1.3 RESEARCH QUESTIONS....................................................................................................2

1.4 RESEARCH OBJECTIVES..................................................................................................2

I) MAIN OBJECTIVE.................................................................................................................2

i)SPECIFIC OBJECTIVE............................................................................................................2

1.5 SIGNIFICANCE OF THE STUDY.......................................................................................2

1.6 SCOPE AND LIMITATIONS OF THE STUDY..................................................................3

2.0 LITERATURE REVIEW...................................................................................................4

2.1 INTRODUCTION.................................................................................................................4

2.2 THEORETICAL LITERATURE..........................................................................................4

ASSUMPTIONS OF THE KEYNESIAN THEORY..................................................................4

2.3 EMPIRICAL LITERATURE................................................................................................5

CHAPTER THREE: RESEARCH METHODOLOGY..............................................................8

3.1 INTRODUCTION.................................................................................................................8

3.1 RESEARCH DESIGN..........................................................................................................8

3.2 THEORETICAL FRAMEWORK.........................................................................................8

iv

3.4 WORKING HYPOTHESIS...................................................................................................9

3.5 MODEL SPECIFICATION...................................................................................................9

3.6 NATURE AND TYPE OF DATA.......................................................................................10

3.7 QUANTITATIVE RESEARCH.........................................................................................10

3.8QUALITATIVE RESEARCH..............................................................................................11

3.9 DATA COLLECTION PROCESS......................................................................................11

3.10 DATA PROCESSING AND ANALYSING.....................................................................11

3.11 DATA ANALYSIS...........................................................................................................12

3.7 ETHICAL CONSIDERATIONS.........................................................................................13

4.0 CHAPTER FOUR: RESEARCH FINDINGS AND ANALYSIS.......................................14

4.1 INTRODUCTION...............................................................................................................14

4.2RESEARCH FINDINGS....................................................................................................19

4.3 CORRELATION ANALYSIS...........................................................................................20

4.4 REGRESSION ANALYSIS................................................................................................21

4.5CONCLUSION.....................................................................................................................22

CHAPTER FIVER: RESEARCH SUMMARY, CONLUSIONS AND RECOMMENDATIONS...........................................................................................................23

5.1 INTRODUCTION...............................................................................................................23

5.2 SUMMARY FINDINGS.....................................................................................................23

5.3 CONCLUSIONS..................................................................................................................24

5.4 RECOMMENDATIONS.....................................................................................................24

5.5 SUGGESTIONS FOR THE FUTURE................................................................................25

REFERENCES...........................................................................................................................26

v

LIST OF FIGURES

Figure 4.11 Graph of income in agricultural industry (rural areas)

Figure 4.22 Graph of income in urban areas( Nairobi, Kisumu,Mombasa)

Figure 4.33 Graph of consumption in Kenya.

vi

LIST OF TABLES

Table 3.1 Model specification table

Table4.1 Monthly Basic minimum wages for agricultural industry (rural areas)

Table 4.2 Monthly basic minimum wage for urban areas ( Nairobi,Kisumu ,Mombasa)

Table 4.3 Kenya household consumption in Kshs.

Table 4.4 Spearman’s Rank matrix

Table 4.5 Analysis of Variance.

vii

OPERATIONAL DEFINITION OF TERMS

Regression …This is the study of cause-and –effect between two or more variables

Correlation …This is the study of association between two variables

viii

ABREVIATIONS AND ACRYONYMS

ANOVA-Analysis of Variance

Kshs._Kenya shillings

R(X) –Rank of income (x)

R(Y) –Rank of consumption (y)

WB – World Bank

ix

ABSTRACT

The relationship between income and consumption has been a point of discussion for almost a century now since the times of John Maynard Keynes, Milton Friedman , Richard Brumberg, among other economists. The study of income on consumption behavior , tried to analyze the the impact of a unit change in income on consumption (increase or decrease in income) under the research objective: To find the cause and effect of income on household consumption. The research looked at consumption that included all goods and services acquired or purchased by the households but excluded those used for business purposes or accumulation of wealth but included windfalls.

The study used the Keynesian theory of consumption as the focal point of reference and inference. The Keynesian regression equation was that ,C=a+c Yd ,whereby a=autonomous consumption(windfall),c marginal propensity to consume and Yd is real income .Valuable empirical literature existed that studies the relationship between the two valuables at a cross-country level. However, not much literatures existed on a country specific level. The main objective of the study therefore was to fill the gap in a country specific level by exploring the relation between a changes in income on household consumption at the Kenyan level.The study tried to find answers to these questions i)What is the cause-and –effect between income and consumption?ii) Is there any correlation between income and household consumption?iii) What are the implications of these changes of income on household consumption? Under the umbrella objective of finding the cause and effect between income and consumption.

The study used secondary data from varied government (Ministry of Labor) sources and non-governmental organizations (World Bank) to analyze the causality between the variables of consumption and income by applying regression and correlation analysis of the data collected. The results showed a weak positive of 0.3 correlation between the variables; that’s a unit increase in income led to a corresponding but not equal increase in consumption. Reasons found were that they tried to divert their consumption to other areas such as tuition fee, savings or reduce consumption due to the cost of living especially in urban areas and finally they grew their own food thus lowering the purchase of goods and opting for self sufficiency. The research further found out that in cases where consumption declined households income increased constantly. The study suggested that the government to cushion consumers so as enable them avoid decline in consumption as it was witnessed in 1997-1998 among others.

x

CHAPTER ONE

1.0 INTRODUCTION

1.1BACKGROUND OF THE STUDY

The research study found out that household consumption is a major component of income.

Various hypothesis derived by renowned economists had indicated that income and

household are strong positively correlated .However, as it was found in the study income and

consumption even though they positively correlated their correlation is weak.

Browning and collado detected that there is a change in consumption but not a sensitive one

when there’s a small change in income and where due to rationality. Indeed as the research

found out that income increase was relatively small to influence changes in consumption a

function that formed the background of my study.

1.2 STATEMENT OF THE PROBLEMConsumption has been a center of focus for over a century now since the times of John

Keynes .The significant place it holds reflects the consumer behavior to an income change in

real income. According to Shea(1995),noted that different consumption models imply that

different responses of consumption to predicted income increase and declines. This was well

shown as consumers increased consumption as income rose but later declined and various

reasons were found out between the variables.

Evidently, there were some correlation between income and consumption. Therefore the

purpose of the study was to analyze the impact of a change in income on household

consumption and the extent of this impact on a country specific level.

1

Various studies have been done relating to the field of study. :(Browning and

Collado2000,Garcial et al1997,Shea1995, Jappeli and Pistferi2000 and Souleles 2000).None

of these studies were on a country specific level, hence the research sought to fill the gap.

1.3 RESEARCH QUESTIONSi)What is the cause-and –effect between income and consumption?

ii) Is there any correlation between income and household consumption?

iii) What are the implications of these changes of income on household consumption?

1.4 RESEARCH OBJECTIVES

I) MAIN OBJECTIVETo find out the cause and effect between income and household consumption

i)SPECIFIC OBJECTIVETo find out the correlation between income and household consumption and analyze it.

To find out how a change in income influences household consumption and its applicability.

1.5 SIGNIFICANCE OF THE STUDYThe study basically sought to analyze the impact of a change in income on household

consumption. To the greatest of my knowledge this study helped to derive conclusions and

recommendations both to the households and government on how to come-up with policies

aimed at encourage household (demand) to promote the economy (part on government) or to

reduce consumption and encourage savings for investment to cater for future joblessness or

retirements(part of households).

The research based its study on the Keynesian theory of consumption (1936) in the Kenyan

context.

2

The trigger of the study targeted majorly Kenyan households who did small income jobs and

did their purchases in either shopping areas or grew their own food. Therefore it split the

targeted population rural (agricultural industry) and urban areas (Nairobi, Kisumu and

Mombasa)

1.6 SCOPE AND LIMITATIONS OF THE STUDYThe scope of this study was to stimulate the hidden truth and explore open secret behind

income changes on household consumption in Kenya. So, it was my obvious aim to bring out

the black and white analysis of households consumption in relation to an income change. On

the other hand, everything has its own pros and cons, thus this research study cannot be

exception to this limitation. The limitation that this study consist of;

i) Quality of researchThe originator of the primary research are largely self-governed and controlled by their own

opinions .Therefore, the study had to scrutinize closely since the data validity may be

questionable.

ii) Incomplete informationIn many cases information was not complete hence, the researcher had to carry out some

estimations and averaging an issue that was of concern in the study especially income on

urban households in 1997 and 2001

iii) Not timelyExtensive scrutiny was carried out to ensure data used was relevant to the current situation so

as to avoid use of invalid data, a problem mostly associated with secondary data.

3

2.0 LITERATURE REVIEW

2.1 INTRODUCTIONThis section analyzed the various theoretical studies that have been carried out by various

researchers .They formed a major point of reference during the study.

2.2 THEORETICAL LITERATUREThe theory that supported this research study was the Keynesian theory of consumption. This

theory was developed by John Keynes in 1936.It focused on income and how it affected the

household’s consumption behaviors. The implication of this is that peoples’ consumption

depends on their exogenously given level of real income. The Keynesian Theory is a neo-

classical theory which looks at income from various points of view. A key implication of this

consumption function fueled the study.

ASSUMPTIONS OF THE KEYNESIAN THEORYThe research used the macroeconomic study of Keynesian theory of consumption function on

income, which relied on three key basic assumptions

i) Rigid prices: Keynesian theory assumes that prices are inflexible and do not quickly

adjust to equilibrium.

ii) Keynesian also assumed that consumption expenditures depend on actual income

received by household in each sector. If the household sector had more income

because the economy is expanding then the increase consumption expenditure.

The Keynesian Theory formed the focus of my study .However, it had few weaknesses as

discussed below

i) The Keynesian consumption function only bases consumption on current income and

ignores potential future income

4

ii) As it was established the Keynesian model in order to be valid, the two basic

determinant of income namely, the consumption function and the investment must

remain constant .At the very least it must be possible for these two variables to

remain constant, if they are not generally the Keynesian model is to remain constant

for the required length of time .

iii) It’s an important fact usually overlooked, that the Keynesian assumption of a rigid

consumption function assumes a given distribution of income .Therefore, the change

on the distribution of income will cause change of unknown direction and magnitude

in the consumption function .Furthermore, the undoubted emergence of capital gains

will change the consumption function.

2.3 EMPIRICAL LITERATUREIncome is recognized as a major contributor to changes in consumption. The changes may show

some episodes of decline and increase depending on change in income. As it was established the

change in household consumption also dependent on individual’s sensitivity to income change.

Garcial et.al (1997) used a statistical approach to distinguish between positive and negative

expected income growth. Found out that in some instances consumers (households) are more

sensitive to income growth based on past information. Shea (1995), noted that different

consumption to predicted income increase and declines. Under myopia, consumption tracts

income and consumption should respond equally to predictable income increases and declines.

According to Jappeli and Pistaferri (2000), used the subjective and quantitative income

expectations available for a sample of Italian households as an instrument for income growth and

found enough evidence between income increase and decline on consumption.

5

Episode of income increase

The research established that income increased among the households at one point, which

resulted from employee pay rise, increase in windfalls from government or friends or taking a

loan from bank or Chama’s. According to Browning and Collado(2001),they detected that there

is a change in consumption but not a sensitive one when there’s a small change in income where

due to consumer rationality. Consumers tend to smooth consumption and follow the theory when

expected income changes are large but are less sensitive when the changes are small.

Episodes of income decline

The research study looked at the existing literatures on the cases of income decline and its impact

on consumption. The most predictable decline in one’s income and subsequent consumption

occurs at retirement or retrenchment. According to Banks ,James and Blundell (1998), who

used cross-sectional data on the England families and found out that consumption declined at

one’s retirement .Barnherein et al (2001) repeated the test for the United States using the PSID

and also found out evidence of a substantial consumption drop at retirement.

There are other factors that causes a decline in consumption; they include retrenchments,

diversion of income to education, health, insurance and leisure. Indeed according to

Souleles(2000)studied the consumption effect of expected disposable income declines that were

induced by paying college fees.

The various studies that have been carried out on income changes on consumption helped to find

the knowledge gap that most Kenyans in tend to either adjust their consumption upwards or

downwards depending on the prevailing economic conditions. However, some ought to remain in

6

their current state despite income increase so as to divert extra income into education, health,

insurance, savings etc., while others adjust their consumption in relation to a change ins income

7

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 INTRODUCTIONThe study explored the problem in a positive view, using descriptive research strategy because it

aimed to know more about the phenomenon that income has impact on household consumption.

The study looked at the problem by utilizing data from various secondary sources that’s from the

Ministry of Labor and the World Bank. As well as explored different literatures related to the

study.

3.1 RESEARCH DESIGNIt’s the blue print of gathering and analyzing data. It was a work plan owing to the objective of

the research study. The study used descriptive research design because the characteristics of the

study required to study questions like how a unit change in one variable influences the other

variable. In descriptive I chose time series data because of time limitation

3.2 THEORETICAL FRAMEWORKThe theory that supported the study was the Keynesian theory of consumption which was

developed by John Keynes in 1936.The theory mainly focused on consumption and how it

associates with income as stated below

C=α+β Y

Where; c is consumption

α is autonomous consumption which is independent on income

β is marginal propensity to consume

Y is real income

8

On this regards the relationship between independent variable and dependent variable was

identified as follows

Independent variables Dependent variables

Autonomous income denoted as α Household consumption denoted as c

Marginal propensity to consumer denoted asβ

Real income y

3.4 WORKING HYPOTHESISAbsolute income hypothesis based its argument that consumption is a function of absolute

consumption depends on pure income.

Ho:α=0 Alpha is not statistically significant

Ha:α≠0 Alpha is statistically significant

Ho:β=0 Beta is not statistically significant

Ha:β≠0 Beta is statistically significant

3.5 MODEL SPECIFICATION The study specified its model as follows

C=α+β Y

Where; c is consumption

9

α is autonomous consumption which is independent on income if an individual income fell to

zero of his existing spending could be sustained by using savings.This is known as desaving.

β is marginal propensity to consume ,Simply ,it is the percentage of each additional shilling

earned that will be spent.There was a positive relationship between spending and income though

a weak one in that a rise in income resulted to arise but unproportional rise in consumption.

Y is real income

3.6 NATURE AND TYPE OF DATAData is a piece of fact ,the wholesome aggregate of which gives the information. The

information actually contributed to the inquiry of truth and approaches to the reality .The nature

of data I used in my research project was secondary data. This is because it was already available

and has been collected by the World Bank and the Ministry of Labor and was very crucial for my

investigation. Since this study was mounted on the base of description and analysis, therefore

secondary data was a must. The various internal source that the Ministry of Labor and external

source that’s the World Bank were utilized for acquiring the secondary data.

3.7 QUANTITATIVE RESEARCH Since this study was based on and more concentrated on the impact of income on households

consumption, on this regard quantitative research was carried out. This type of was very useful to

quantify the information on the findings in the numerals. Quantifying of logical information to

numerals was the best way to come to inferences. This was because it helped to analyze the

calculated information with the standard normative values and helped in comparisons. The type

of research diagnoses casual relationship between the variables and the parameters was

conducted and expressed in terms of ratios.

10

3.8QUALITATIVE RESEARCH

Since the objective of the research was to analyze the casual relationship between income and

consumption, theoretical approach was very crucial as it provided a basis of forming the

statistical relationships.

3.9 DATA COLLECTION PROCESS The research study used secondary data therefore data from on consumption was collected from

the World Bank website ,however data from the Ministry of Labor on income was accessed

from their office with permission from the officials.

3.10 DATA PROCESSING AND ANALYSINGThe secondary data collected was molded as per the requirement and objectives of the

research.The various steps that were followed included;

i) Data processing

a) Editing : Data was edited to make sure that there no errors and omissions so as to

avoid violations of OLS assumptions of heteroskedasticity ,multycollineality and

autocorrelation.

b) Coding: Data was coded so as to make the research study more systematic and

scientific ,numerals were assigned and symbols done in a coherent manner.

c) Classification: Data was in large volumes there it had to be classified into

homogenous groups that’s in rural and urban income for easier analysis.

d) Tabulation: After the successful classification of data,it was then arranged in tables

or tabulated in away to meet the standards and quality of the research.Tabulation was

essential for the systematic and logical arrangement of data for further manipulation.

11

ii) Analysis

Analysis was the means to estimate the unknown values and parameters of the data.This

was very crucial to provide cases for and against the hypothesis .To achieve these goal

analysis was divided into two categories viz descriptive and inferential

a)Descriptive Analysis :It incorporated the study of distribution pof variables.This

study provided the information about the various types and nature of income and

consumption behaviors

b)Inferential Analysis: Basically I opted to use the normal method of obtaining the

ANOVA and the Spearman rank correlation coefficient to obtain the variables and draw

conlusions .This was so because the data did not attain the thirty required mark so as to

apply SPSS.

3.11 DATA ANALYSIS

The collected data was analyzed using descriptive statistics. Due the data failing to meet the

thirty mark required to apply the SPSS therefore I applied the normal method to obtain the

ANOVA and Spearman’s rank coefficient determination to obtain the correlation. . Data

collected was also scanned to ensure it was complete and that all instructions had been followed

by the respondents. Descriptive statistics included mean scores, and proportions which were used

to establish the importance of variables under study. A simple regression analysis was conducted

to test the relationship between the independent variables and the dependent variable .Results of

data analysis were presented in the form of tables and figures to help establish how income

affects consumption in Kenya.

12

3.12 ETHICAL CONSIDERATIONS The study was carried out with the available funds and within the available timeframe without

compromising its quality. Ethical considerations included confidentiality of information, names,

and sources The researcher ensured that all data collected was from distinguishable sources and

they were included in the references.In cases where data access required permission for example

accessing the ministry of labor all due considerations were made.

13

4.0 CHAPTER FOUR: RESEARCH FINDINGS AND ANALYSIS

4.1 IntroductionThis chapter covers data findings and analysis of the research. The data was summarized and

presented in the form of tables and graphs. The study established the consumer behavior in

relation to a unit change in real income .The research looked at data on income in rural areas

(agricultural industry) and urban areas (Nairobi, Kisumu and Mombasa).

Table 4.1 Gazette Monthly Basic Minimum Wages for Agricultural Industry (rural areas)

Type of employee(18

years and above)

1997 1998 1999 2000 2001 2002 2003 2004

Unskilled employee 1095 1259 1347 1428 1535 1642 1808 2096

Stockman, herdsman

and watchman

1263 1453 1555 1648 1772 1896 2180 2420

House servant 1249 1436 1537 1629 1751 1874 2155 2392

Farm foreman 1973 2269 2428 2574 2767 2961 3405 3780

Farm artisan 1278 1470 1573 1667 1792 1917 2257 2585

Tractor driver 1309 1505 1610 1707 1835 1963 2393 2505

Combined driver 1387 1595 1707 1809 1945 2081 2636 2656

Lorry driver 1628 1757 1880 1993 2142 2292 2767 2926

Section foreman 1604 1845 1974 2092 2249 2406 2529 3701

Average 1421 1621 1735 1839 1976 2115 2459 2781

Source: Economic survey central bureau of statistics from ministry of labor and human

resource development.

14

Graph 4.12 Agricultural industry

1997 1998 1999 2000 2001 20020

500

1000

1500

2000

2500

average income

average income

The research established that income in the agricultural sector increased or rose at an

approximately 25% each year. Factors that were found out is that the cost of living pushed the

consumers to demand a pay rise resulting to a constant increase in income throughout the years.

The study further analyzed data in urban areas and the information was presented in the table

below.

15

Table 4.2 Gazette Monthly Basic Minimum Wages in Urban Areas(Nairobi, Kisumu and

Mombasa)

Occupation-years 1997 1998 1999 2000 2001 2002 2003 2004

General laborer 2023 2697 2886 3059 3288.5 3518 3905 4335

Cooks 2616 3488 3732 3956 4253.5 4551 5052 5608

Night watchman 2184 2912 3116 3303 3551.5 3800 4218 4682

Machine attendant 2258 3008 3279 3412 3668.5 3925 4357 4836

Machinist 2292 3056 3270 3446 3717.5 3987 4426 4913

Tailor, driver 3433.5 4578 4878 5192 5582 5972 6629 7358

Dyer, crawler 3790.5 5054 5408 5732 6292.5 6593 7318 8123

Cashier 4564.5 6086 6512 6903 7421.5 7940 8813 9782

Artisan (ungraded) 2729.5 3639 3894 4128 4438.5 4749 5271 5851

Grade1 3433.5 4578 4898 5192 5556 5972 6629 7358

Grade11 4564.5 6086 651

2

6903 7421.5 7940 8813 9782

Average 3081 4107 445

5

4657 5008 5358.8 5948 6603

16

Graph 4.22 income in urban areas

1997 1998 1999 2000 2001 2002 2003 20040

1000

2000

3000

4000

5000

6000

7000

average income

average income

Urban income provided a significant point of focus at the data showed high relarative rise in

income as compared to rural areas. This crucial as the cost of living in urban areas was high as

compared to rural areas where individuals provided their own food therefore self sufficiency.

Consumption data was collected from the World Bank and presented in table 4.3

Table 4.3 Kenyan household consumption in Kshs

Year Consumption value

1997 10231240000

1998 10657320000

17

1999 9867677000

2000 9781105000

2001 9618951000

2002 10633640000

2003 11497520000

2004 13572130000

Source: World Bank national accounts data. WB

The graph 4.33 below shows consumption in vertical axis and years in horizontal axis

1997 1998 1999 2000 2001 2002 2003 20040

2000000000

4000000000

6000000000

8000000000

10000000000

12000000000

14000000000

16000000000

CONSUMPTION

CONSUMPTION

Consumption was taken as overall to cover both in rural and urban areas,therefore individual

consumption rose from 1997-1998 and then dropped further in 1999-2001 and then rose again

18

from 2002-2004.The consumption cycles observed were due to inflation rates in the country,

consumer behaviors and policies adopted by the government to promote or discourage

consumption.

4.2RESEARCH FINDINGSThe research found out that income in rural areas was different from that in urban areas, but

consumption was taken as a combination of both rural and urban areas .It was established that

income in agricultural industry (rural areas) rose at an approximately 25% annually while that in

urban areas also by 25% .However, consumption did not take the same correlation as it rose from

1997-1998 then dropped drastically from 1999-2001 and then rose from 2002-2004.

The research found out that as income rose by 25% both rural and urban consumption rose by

4.165% from 1997-1998 then dropped by 0.877% from 1998-2001.The reasons cited were that

households diverted their income to cater for

I) To cater for education fees

ii) To increase their savings so as to take advantage of future investment opportunities

iii)High cost of living forcing households to cut down their consumption behaviors

iv) Households diverted from purchasing in formal outlets and grew their own food. So as to

have more income for speculative and precautionary purposes.

19

4.3 CORRELATION ANALYSISIn testing linear relationship between the dependent and independent variable, correlation

analysis was used as a very important indicator in determining the strengths and weaknesses of

variables in the model. Correlation greater than 0.8, reflects a high correlation among the

variables. The analysis was presented in the table4.4 below

YEAR AVERAGE

OF RURAL

AND

URBAN

INCOME (X)

CONSUMPTION(Y) R(X) R(Y) D(RX-

RY)

D2

1997 2222.5 10231240000 1 4 -3 9

1998 2837 10657320000 2 6 -4 16

1999 5716 9867677000 8 3 5 25

2000 3217 9781105000 3 2 1 1

2001 3459 9618951000 4 1 3 9

2002 4239 10633640000 5 5 0 0

2003 4737 11492520000 6 7 -1 1

20

2004 4692 13572030000 7 8 -1 1

∑D=0 ∑D2=62

The correlation above was analyzed by use of spearman’s rank coefficient, as calculated below

R=1− 6 εD2

N (n2−1)

= 0.2619 approx.0.3

The research study concluded that income and consumption had a weak correlation of 0.3

meaning that income change had a relatively small impact on consumption. Therefore it was

found that income had a 30% impact on household consumption and the other factors being held

constant.

4.4 REGRESSION ANALYSISThe variables having passed all the statistical tests ,regression analysis was conducted. The study

estimated simple regression model. The results were tabulated as shown in table 4.5

BY ANALYSIS OF VARIANCE

SOURCE OF

VARIATION

SUM OF SQUARES DEGREE OF

FREEDOM

MEAN SUM OF

SQUARES

21

BETWWEN

SAMPLES

16.895 2-1 16.895/1=16.895

WITHIN SAMPLES 6.753 8-2 6.753/6=1.1255

TOTAL 23.648 8-1 F=16.895/1.1255=15.011

TABLE 4.5 ANOVA

The F critical was calculated as follows F,1,6,0.05 ( I used the 5% level of significance)

F critical =6.61. Therefore :15.011>6.61 .This means that the overall model is statistically

significant meaning that income influences consumption.

4.5CONCLUSIONIt can be concluded that income had an impact on household consumption but not a major

impact. This was shown in that income rose significantly thought the years at 25% but

consumption rose by 4.1665% from 1997-1998 then fell by 0.887% from 1999-2001 then rose

again by 15.28% from 2002-2004.This scenario indicated that even though income and

consumption had a positive correlation ,their association was weak to some extent thus positively

weakly correlated. The results showed a weak positive of 0.3 correlation between the

variables; that’s a unit increase in income led to a corresponding but not equal increase in

consumption. Reasons found were that they tried to divert their consumption to other areas such

as tuition fee, savings or reduce consumption due to the cost of living especially in urban areas

and finally they grew their own food thus lowering the purchase of goods and opting for self

sufficiency. The research further found out that in cases where consumption declined households

income increased constantly.

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CHAPTER FIVER: RESEARCH SUMMARY, CONLUSIONS AND RECOMMENDATIONS

5.1 INTRODUCTIONThis chapter presents the research summary of the collected findings, the conclusion drawn from

these findings and the recommendations the research study made.

5.2 SUMMARY FINDINGSThis study investigated the influence of an income change on household consumption in Kenya.

The objectives of this study were categorically and majorly founded on the Keynesian Theory of

consumption which looked on how consumption and income are related. This model was

regressed and correlated by use of ordinary methods, this was so because the time series data did

not reach 30 so as to apply the SPSS. The correlation analysis was calculated using the

Spearman’s rank matrix and it showed that income and household consumption had a weak

positive correlation of 0.3 meaning that their association was not such strong. Also the regression

analysis involved use of normal method of calculation due to the inability of the data to attain the

required total of 30 so as to apply the SPSS. The regressed data used the ANOVA method

showed that the variables were statistically significant.

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The population included the Kenyan household consumers who did small, jobs and spend their

income on daily purchases both in rural and urban areas.

The study revealed that income in rural areas was different from that in urban areas, but

consumption was taken as a combination of both rural and urban areas .It was established that

income in agricultural industry (rural areas) rose at an approximately 25% annually while that in

urban areas also by 25% .However, consumption did not take the same correlation as it rose from

1997-1998 then dropped drastically from 1999-2001 and then rose from 2002-2004.

The research found out that as income rose by 25% both rural and urban consumption rose by

4.165% from 1997-1998 then dropped by 0.877% from 1998-2001

5.3 CONCLUSIONSIt can be concluded that income had an impact on household consumption but not a major

impact. This was shown in that income rose significantly thought the years at 25% but

consumption rose by 4.1665% from 1997-1998 then fell by 0.887% from 1999-2001 then rose

again by 15.28% from 2002-2004.This scenario indicated that even though income and

consumption had a positive correlation ,their association was weak to some extent thus positively

weakly correlated. The results showed a weak positive of 0.3 correlation between the

variables; that’s a unit increase in income led to a corresponding but not equal increase in

consumption. Reasons found were that they tried to divert their consumption to other areas such

as tuition fee, savings or reduce consumption due to the cost of living especially in urban areas

and finally they grew their own food thus lowering the purchase of goods and opting for self

sufficiency. The research further found out that in cases where consumption declined households

income increased constantly.This evident showed the reasons why most households demanded

a pay hike and the fact that inflation currently stands at 7% .

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5.4 RECOMMENDATIONSBased on the study findings, the Kenyan household consumers increased their consumption

from 1997-1998 and then declined from1999-2001 and again rose from 2002-2004.From the

above analysis it was evident that between 1998 -2001 the decline was due to the depression

experienced in the country. The government should come up with policies to cushion consumers

in cases of unprecedented economic cycles like depression which include subsidization of daily

consumed commodities such as food, clothes so as to encourage demand and therefore enhance

investments due to ready markets. The government should also encourage savings so as to cater

for sudden events such as retrenchments and retirements.

Finally the study recommended that households to strive to avoid too much spending in case of a

rise in income and instead divert the extra income to investment projects as a way to reduce

overdependence on only income.

5.5 SUGGESTIONS FOR THE FUTURE This study investigated the change in income on household consumption in Kenya. Lack of

proper government mechanism to guide household and subsidize their purchases may have

resulted to change in household consumption (increase and decline over the economic

cycles).Further studies on specific country level will help identify these cause and effect between

the variables and thus increase data base for policy makers in Kenya.

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