Correlation between the public finance and the Gross Domestic Product (Term Paper Sample)

TERM PAPER: PUBLIC FINANCE AND GDP (GROSS DOMESTIC PRODUCT) PER CAPITA IN KENYA: 1993-2001
COURSE: SURVEY RESEARCH METHODS
COURSE CODE: STA 434
PRESENTED BY: MUOKI BENEDICT KIILU
REGISTRATION NUMBER: X75/27627/2009
TABLE OF CONTENTS
Abstract 3
CHAPTER ONE
Introduction 4
Background to the problem 4
Statement to the problem 6
Objectives of the study 7
Justification of the study 7
CHAPTER TWO
Methodology 8
Model specification 9
CHAPTER THREE
Data analysis and empirical results 10
Testing for significance 12
Limitation of the study 13
CHAPTER FOUR
Conclusion and policy recommendations 14
Bibliography 15
Appendix 16
ABSTRACT
This term paper tries to link the relationship between public finance (government expenditure) and GDP per capita from the period of 1993-2011 to establish whether there is a correlation. It is based both on Keynesian theory and Wagner theory which explains the impact of both variables i.e. public finance and GDP (economic growth) on one another.
CHAPTER ONE
1.0 INTRODUCTION
1.1Background to the problem
Government involvement has been used to propel most developed countries to their current status as it ensures that the market failure is not consistent and resources are allocated effectively. Although bureaucracies and special interest groups in government tend to affect the positive effect of public finance on the economic growth, developed countries focus on uprooting this menace to ensure a smooth effective operation, in the contrary less developed countries (Kenya etc) have tried this approach to spur economic growth but the levels of corruption and bloated government have slowed down the trend to a better economic environment.
GDP per capita shows the development of a country by measuring what share of income is available to each citizen of a country. Although it is not mostly regarded as a true measure development compared to human poverty index and happiness index, it is mostly used in less developed countries to show their progress towards economic prosperity.
In Kenya post colonial period, GDP and public finance have been on a positive growth but public finance have been on the high, the rates, courtesy of statistical abstracts is 19.19% on the average per annum of the public finance and 8.1% on the average per annum of the GDP.This statistic may indicate that Kenya is included as following the Wagner’s law where economic growth is what influence public finance .GDP per capita also has been on the rise by a rate of 0.5% per annum on the average. The use of fiscal stabilizers and discretional fiscal adjustments (or a combination of both) was used in Kenya case to ensure a positive economic growth, government budget (Branson, 1989) spelt the public finance activities such as pattern and levels of consumptions of commodities, volumes of production of commodities, allocation of resources, distribution of wealth and income, levels of prices and employment rates. It was found in the Kenyan case (Ram, 1986) consumption public finance had a negative impact while (Barro, 1990) had a positive impact on the GDP.
The use of long term policies pronounced in session paper number10 of 1965(republic if Kenya) and 5-years national development that guides the planning and investment (republic of Kenya, 2002) were used to try and guide the economy on the prosperity track. In 2003, the government under hon. president Mwai Kibaki adopted the economic recovery strategy (ERS) (republic of Kenya, 2003) and currently the vision 2030(republic of Kenya, 2007) which is devised on 5-years medium term plans. Although public finance showed that it had a positive growth, not all was channeled towards economic improvements .structural adjustments programs were used to shape the economic fraternity to ensure effectiveness of both the public and private sectors. These programs include retrenchments and stopping of clerks’ enrollments to focus on public services that were being demanded by constantly growing population.
The population growth rate in Kenya (1979-2008) has been 3.17427% on average with skewness of 0.213533% showing it has been on a slow trend.GDP per capita in Kenya has been ksh.398.77 on average per annum with a skewness of 1.8762 showing it has been on a slower growth pace than the population growth rate. On the current population of 40+ million Kenyans, the income available to each household is diminishing as the rate of economic growth rate is below 7% on average per annum.
It is of essence thus to study public finance to ensure that it spurs enough economic growth to ensure that the share of income available to every household (GDP per capita) is substantial.
1.2 STATEMENT OF THE PROBLEM
According to the Keynesian theory, public finance (government expenditure) has a positive influence on the economic growth. Countering recessions (Mitchelle, 2005) government increased their expenditure to improve the economic growth by ensuring that the purchasing power is injected into the economy through public expenditure.Regardesss of the government size, the public finance was viewed as a critical sector of enabling economic growth. It was cited that (Mankiw, 2000) government purchases raised the incomes in a country raising consumption which eventually increases the incomes and the process is cyclical.
In Wagner’s theory, economic growth leads to a higher public finance. This is explained by the technological requirements needed to facilitate urbanization and industrialization intensively and extensively (Bhatia, 2008).it is also followed by the need of expanding the social amenities to improve the human capital to maintain that rate of economic growth rate.
Both theories try to establish a relationship between the public finance and economic growth and the direction it takes .most research undertaken have been bidirectional results making it inconclusive to assert the true relationship.(Musgrave and Musgrave,1989),GDP per capita available to households which is dependent on the economic growth and determines expenditure and consumption levels in a country is important to establish relative to public finance and population growth rates .
Thus the influence of these relationships will be investigated in Kenyan case to establish the direction. Thus the main purpose is to see if the Kenyan case articulates to either Keynesian’s or Wagner’s laws.
OBJECTIVES OF THE TERM PAPER
The term paper main objectives are;
1. Explain the main components of public finance
2. Establish the relationship between public finance and GDP per capita, also inclusive of population rates.
3. We draw the necessary conclusions and recommendations which will guide to from effective policies.
JUSTIFICATION OF THE TERM PAPER
It is of importance to understand the public financial administration to know what is essential for the opulence at the individual level (GDP per capita).this can hint policy makers in implementing effective policies which will ripple to the household by ensuring a necessary level of income is available to them.
It is also of importance to spell out the importance of government involvement in the market to ensure that the economy doesn’t collapse but thrives to a better level.
CHAPTER TWO
METHODOLOGY
To establish the relationship between public finance and GDP per capita with population growth rates, simple regression representation will be used to explain the correlations and direction of influence
Y = β0 +β1trans+β2 inter+β3rec+β4dev +β5 pop+ut
Y- GDP per capita in US $
β0 -the value of GDP per capita irrespective of the other variables.
Trans- transfer payments in public finance
Inter-interest rates payments in public finance
Rec-Recurrent expenditure in public finance
Dev-development expenditure in public finance
Pop-population rates per annum
ut-error term for the simple regression model capturing other factor that influence GDP per capita i.e. inflation rates ,money supply, aggregate demand and aggregate supply and the level of employment.
βs represent the unknown parameters to be determined through simple regression process.
Transfer payments, interest rates payments, recurrent expenditure and development expenditure combined make up public finance and will influence GDP per capita through economic growth and relative to population growth since GDP per capita is found by dividing GDP by the whole population.
MODEL SPECIFICATION
The model to be used to estimate the βs will be the use of OLS technique since it’s a simple regression and the estimates are linear and unbiased. It is also convenient since am using time series data.
The explanatory variables (Public finance) will be regressed relative to the dependent variables (GDP per capita) to determine the impact and the direction of correlation.
DATA TYPE AND DATA SOURCE
the term paper uses secondary time series da...