CHAPTER I

INTRODUCTION

1.1 GENERAL BACKGROUND

Gross Domestic Product (GDP) and consumption are related in the sense that even though
GDP is calculated using several measures, consumption is the single most important
component. Other details used to calculate the GDP of a nation include government
expenditure and consumption and net imports. Consumption often makes up more than 50
percent of the GDP calculations of most nations. In some places, consumption makes up
more than 70 percent of the GDP calculations.

GDP was first developed by Simon Kuznets for a US Congress report in 1934. In this report,
Kuznets warned against its use as a measure of welfare. After the Bretton Woods conference
in 1944, GDP became the main tool for measuring a country's economy. Gross domestic
product (GDP) is the market value of all officially recognized final goods and services
produced within a country in a given period of time. GDP per capita is often considered an
indicator of a country's standard of living. The gross domestic product (GDP) or gross
domestic income (GDI) is one of the measures of national income and output. GDP can be
defined in three ways, which should give identical results. First, it is equal to the total
expenditures for all final goods and services produced within the country in a specified period
of time (usually a 365-day year). Second, it is equal to the sum of the value added at every
stage of production by all the industries, plus taxes and minus subsidies on products. Third, it
is equal to the sum of the income generated by production like compensation of employees,
taxes on production and imports less subsidies, and gross operating surplus.

Final consumption expenditure (formerly total consumption) is the sum of household final
consumption expenditure (private consumption) and general government final consumption
expenditure (general government consumption). This estimate includes any statistical
discrepancy in the use of resources relative to the supply of resources. Data are in current
U.S. dollars.

1.2 RELATIONSHIP BETWEEN GDP AND CONSUMPTION

Gross Domestic Product (GDP) and consumption are related in the sense that even though
GDP is calculated using several measures, consumption is the single most important
component. Other details used to calculate the GDP of a nation include government
expenditure and consumption and net imports. Consumption often makes up more than 50
percent of the GDP calculations of most nations. In some places, consumption makes up
more than 70 percent of the GDP calculations.

1
Some countries actually consider consumption to be the main statistic on which to rely when
calculating the GDP. The main relationship between GDP and consumption is the fact that a
rise in the level of consumption translates to a corresponding rise in the level of the GDP.
Consumption may be divided into several categories. The consumption of nondurable goods
refers to the consumption of perishable goods or other goods that last generally last less than
three years. The consumption of durable goods refers to nonperishable goods and goods that
last for a period exceeding three years. Consumption of services refers to the consumption of
services like electricity, cable and other types of resources.

GDP and consumption are also related in the sense that changes in the GDP can lead to
changes in interest rates and also changes in exchange rates. The relationship between GDP
and consumption means that any undue changes in the level of consumption either way can
lead to a rise or fall in the GDP. A rise in the GDP could be a signal of strong economic
growth and increased consumer confidence. A decrease in the level of the GDP could
indicate a downturn in the market caused by a decrease in demand for goods and services.

1.3 GDP AND CONSUMPTION OF NEPAL

The Gross Domestic Product (GDP) in Nepal was worth 18.88 billion US dollars in 2011.
The GDP value of Nepal represents 0.03 percent of the world economy. GDP in Nepal is
reported by the World Bank. Historically, from 1960 until 2011, Nepal GDP averaged 4.00
USD Billion reaching an all time high of 18.88 USD Billion in December of 2011 and a
record low of 0.50 USD Billion in December of 1963. The gross domestic product (GDP)
measures of national income and output for a given country's economy. The gross domestic
product (GDP) is equal to the total expenditures for all final goods and services produced
within the country in a stipulated period of time.

The value for Final consumption expenditure (current LCU) in Nepal was 1,228,320,000,000
as of 2011. Over the past 36 years this indicator reached a maximum value of
1,228,320,000,000 in 2011 and a minimum value of 14,909,000,000 in 1975. The latest value
for Final consumption expenditure (current US$) in Nepal was $16,938,540,000 as of 2011.
Over the past 36 years, the value for this indicator has fluctuated between $16,938,540,000 in
2011 and $1,195,840,000 in 1977. Final consumption expenditure, etc. (% of GDP) in Nepal
was 91.38 as of 2011. Its highest value over the past 46 years was 99.71 in 1965, while its
lowest value was 84.34 in 1995

1.4 Nepal GDP Annual Growth Rate at 4.63 Percent

The Gross Domestic Product (GDP) in Nepal expanded 4.63 percent in the fiscal year 2011-
12 from the previous year. GDP Annual Growth Rate in Nepal is reported by the Central
Bureau of Statistics, Nepal. Historically, from 1994 until 2012, Nepal GDP Annual Growth
Rate averaged 4.43 Percent reaching an all time high of 8.60 Percent in June of 1994 and a
record low of 0.10 Percent in June of 2002. Nepal is one of the least developed countries in

2
the world and relies extensively on foreign aid. The main sector of the economy is
agriculture, which employs over 70 percent of the population and accounts for 33 percent of
GDP.

1.5 STATEMENT OF PROBLEMS

This study sought to examine knowledge about Gross Domestic Product (GDP).So, this
research done to measure whether the factors such as inflation, government expenditure and
export influenced the Gross Domestic Product in Malaysia.

From the problem statement and objectives of the study, the researcher came out with four
research questions:

 How significant is the relationship between inflation affect gross domestic products
(GDP)?
 To what extent the consumption expenditure impacts gross domestic products (GDP)?
 Did export affect the gross domestic product (GDP)?

1.6 OBJECTIVES OF THE STUDY

The basic objective of the study is to investigate the causality between consumption and
economic growth, and to obtain policy implications from the results. It includes the following
specific objectives:
 To review major models of GDP and Consumption and identify the appropriate model
for Nepal.
 To determine the factors that influenced Gross Domestic Product
 To examine the relationship between each of independent variables with dependent
variable.
 To study which is the most significant variable that contributed to the performance of
Gross Domestic Product.

1.7 RESEARCH HYPOTHESIS

In this study, hypotheses were built to examine the relationship between independent variable
and dependent variable. There are two types of hypotheses. The first type is null hypothesis
(Ho ) and the other hypothesis is known as alternative hypothesis (Ha). Null hypothesis is a
proposition that states a definitive, exact relationship between two variables. In general, the
null statement is expressed as no (significant) relationship between two variables or no
(significant) difference between two groups. The hypothesis will come out such as follows:

Hypotheses 1

Ho = There is no significant relationship between consumption and GDP

Ha = There is a significant relationship between consumption and GDP

3
1.8 LIMITATIONS OF THE STUDY
In order to complete this research, a number of limitations are faced by the researcher such
as:

 Time constraint and duration of the study.

 The study has not been focused on qualitative aspects of the performance in depth,
only a qualitative aspect has been analyzed.
 The study includes data of few years; therefore the conclusion can’t be generalized.

1.9 ORGANIZATION OF THE STUDY

The study is presented in five chapters. Chapter two will present a review of literature and
relevant research associated with the problem addressed in this study.The methodology,
design of research, sources of data and procedures used for data collection, analysis and
interpretation which is outlined in chapter three. Chapter four consist of analysis and
interpreting data and reaching to the finding. Summary and discussion of research findings,
implications for future research are presented in chapter five.

4
 CHAPTER II
LITERATURE REVIEW

2.1 REVIEW OF LITERATURE

Consumption occurs through both Institutions and Industry as well as by individuals. The
dividual consumption rise, also leads to increased aggregate demand. The accelerated
demand leads to increase in production and thus brings back its return to the consumer in the
form of wages & profit. Thus in a simple closed economy, the household spends their
income. This spending on consumer goods (termed Consumption(C)) is the only component
of aggregate demand (AD). But in present day open economy, international trade and
government spending also constitute to the aggregate demand, (ICMR, 2006).

The interrelationship between growths in one sector creating its impact in the economic
development is evident. Every year the national GDP reflects contribution coming from
different sector. There is interdependency between economic development and the
contribution coming from different sectors in enabling it to happen.

Barro (1990) examined an endogenous growth model that suggests a possible relationship
between the share of government spending in GDP and the growth rate of per capita real
GDP. The key feature of Barro’s model is the presence of constant returns to capital that
broadly includes private capital and public services. To the extent that public services are
considered an input to production, a possible linkage arises between the size of government
and economic growth.

2.2 CONCEPTUAL FRAMEWORK

GDP CONSUMPTION

Independent Dependent
2.2 Figure: Conceptual Framework

5
 CHAPTER III

RESEARCH METHODOLOGY

Research Methodology refers to the four various sequential steps to be adopted by a

researcher in studying a problem with certain objective in view. Research methodology
basically describes the methods, processes, tools and techniques applied in the entire process
of a scientific research.

3.1 RESEARCH DESIGN

Research design is a master plan specifying the methods and procedures for analyzing and
collecting the needed information. According to William G Zikmund, it is a framework or
blueprint that plans the action for the research project. It details the procedures necessary for
obtaining the information needed to structure or solve the research problem. The researcher
wants to identify whether the factors such as consumption is influenced performance of Gross
Domestic Product (GDP) in Nepal.

3.2 SOURSES OF DATA

This study is taken from the entire journal from internet, newspaper, library and other related
press to understand the Gross Domestic product (GDP). The previous research reports, books,
library and articles are important sources to understand the issues. This paper includes the
data of Nepal only for the year 1975 to 2011.

3.3 METHOD OF ANALYSIS

The relationship between independent variables and GDP is analyzed by employing model.
Consumption is used as the dependent variable of Model 1. The final regression model
obtained will be analyzed in context of finance and econometrics. The models of this study
are:
Model 1
C =β+β1 X1…………………………………(I)
Where

 C = total consumption,
 β = autonomous consumption (β > 0),
 β1 is the marginal propensity to consume (ie the induced consumption) (0 < β1 < 1),
and
X1 = GDP of the nation

Autonomous consumption represents consumption when income is zero. In estimation, this is

usually assumed to be positive. The marginal propensity to consume (MPC), on the other
hand measures the rate at which consumption is changing when income is changing. The
MPC is assumed to be positive.

6
 CHAPTER IV

DATA ANALYSIS AND FINDINGS

4.1 DESCRIPTIVE STATISTICS

Gross Domestic Product (GDP) and consumption are related in the sense that even though
GDP is calculated using several measures, consumption is the single most important
component. Other details used to calculate the GDP of a nation include government
expenditure and consumption and net imports. Data analysis refers to the analyzing the data
in order to determine the inherent facts or meanings from the tabulated data, presentation &
analysis of data. Data that has been collected are first presented in systematic manner & then
analyzed by applying different financial & statistical tools to achieve the objectives of the
study. The tools applied are as follows:
a. Descriptive Analysis
b. Multivariate Analysis
c. Correlation Analysis

Descriptive Statistics
N Minimum Maximum Mean Std. Skewness
Deviation
Statistic Statistic Statistic Statistic Statistic Statistic Std.
Error
CONSUMPTIO 4762966459. 3812737780.
37 1195840000 17257150000 1.800 .388
N 46 990
5307303055. 4138075182.
GDP 37 1382400000 18884495628 1.775 .388
81 926
Valid N
37
(listwise)

Descriptive table shows that the average consumption of Nepal is $4762966459.4595 and
average GDP is $.5307303055.8108.

4.2 MULTIVARIATE ANALYSIS

Adjusted R2 is used to compensate for the addition of variables to the model. As more
independent variables are added to the regression model, unadjusted R2 will generally
increase but there will never be a decrease. This will occur even when the additional
variables do little to help explain the dependent variable. To compensate for this, adjusted
R2 is corrected for the number of independent variables in the model. The result is an
adjusted R2 than can go up or down depending on whether the addition of another

7
variable adds or does not add to the explanatory power of the model. Adjusted R2 will
always be lower than unadjusted.

ANOVAa
Model Sum of df Mean Square F Sig.
Squares
5214950302 52149503022
Regression 2866845000 1 8668450000. 9942.071 .000b
0.000 000
1835867688
52453362527
1 Residual 472790020.0 35
794000.000
00
5233308979
Total 1714125000 36
0.000
a. Dependent Variable: CONSUMPTION
b. Predictors: (Constant), GDP

The results of the ANOVA are presented in an ANOVA table. This table contains columns
labeled "Source", "SS or Sum of Squares", "df - for degrees of freedom", "MS - for mean
square", "F or F-ratio", and "p, prob, probability, sig., or sig. of F". The t-test tells us if the
variation between two groups is "significant". In general, the purpose of analysis of variance
(ANOVA) is to test for significant differences between means. Generally the level of
significant is taken “1%”, “5%” and, “10%”.

Model Summary
Mode R R Square Adjusted R Std. Error of
l Square the Estimate
229026990.8
1 .998a .996 .996
28
a. Predictors: (Constant), GDP

In the above tables, we can see that the dependable variable (consumption) is highly
significant with its independent variables (GDP) at 1% level of significance. Adjusted R2 is
.996 i.e. 99.6%, it means that the 99.6% variation in the consumption is defined by the GDP.
It means consumption fully depends on the GDP of the nation.

8
 Coefficients a
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
-
61760857.97
(Constant) 118489180.0 -1.919 .063
1 8
01
GDP .920 .009 .998 99.710 .000
a. Dependent Variable: CONSUMPTION

In the above table, we can see that the consumption is positively significant with the GDP at
1% level of significance. It means the increased in the GDP increases the level of
consumption and vice-versa.

4.3 CORRELATION ANALYSIS

Correlations
CONSUMPTI GDP
ON
Pearson Correlation 1 .998**
CONSUMPTIO
Sig. (2-tailed) .000
N
N 37 37
Pearson Correlation .998** 1
GDP Sig. (2-tailed) .000
N 37 37
**. Correlation is significant at the 0.01 level (2-tailed).

The above table reports the regression analysis of CONSUMPTION on GDP.It shows that the
coefficient on Consumption is positive, but statistically significant with GDP. GDP and
consumption are positively co-related. An increase in Consumption tens to increase in GDP.

9
 CHAPTER V

SUMMARY AND CONCLUSION

5.1 SUMMARY

The Gross Domestic Product (GDP) in Nepal was worth 18.88 billion US dollars in 2011. The
GDP value of Nepal represents 0.03 percent of the world economy. GDP in Nepal is reported
by the World Bank. Historically, from 1960 until 2011, Nepal GDP averaged 4.00 USD
Billion reaching an all time high of 18.88 USD Billion in December of 2011 and a record low
of 0.50 USD Billion in December of 1963. The gross domestic product (GDP) measures of
national income and output for a given country's economy. The gross domestic product (GDP)
is equal to the total expenditures for all final goods and services produced within the country
in a stipulated period of time.

The value for Final consumption expenditure (current LCU) in Nepal was 1,228,320,000,000
as of 2011. Over the past 36 years this indicator reached a maximum value of
1,228,320,000,000 in 2011 and a minimum value of 14,909,000,000 in 1975. The latest value
for Final consumption expenditure (current US$) in Nepal was $16,938,540,000 as of 2011.
Over the past 36 years, the value for this indicator has fluctuated between $16,938,540,000 in
2011 and $1,195,840,000 in 1977. Final consumption expenditure, etc. (% of GDP) in Nepal
was 91.38 as of 2011. Its highest value over the past 46 years was 99.71 in 1965, while its
lowest value was 84.34 in 1995.

5.2 CONCLUSION

Some countries actually consider consumption to be the main statistic on which to rely when
calculating the GDP. The main relationship between GDP and consumption is the fact that a
rise in the level of consumption translates to a corresponding rise in the level of the GDP.
Consumption may be divided into several categories. The consumption of nondurable goods
refers to the consumption of perishable goods or other goods that last generally last less than
three years. The consumption of durable goods refers to nonperishable goods and goods that
last for a period exceeding three years. Consumption of services refers to the consumption of
services like electricity, cable and other types of resources.

10
GDP and consumption are also related in the sense that changes in the GDP can lead to
changes in interest rates and also changes in exchange rates. The relationship between GDP
and consumption means that any undue changes in the level of consumption either way can
lead to a rise or fall in the GDP. A rise in the GDP could be a signal of strong economic
growth and increased consumer confidence. A decrease in the level of the GDP could
indicate a downturn in the market caused by a decrease in demand for goods and services.
Another way in which GDP and consumption are related is in the sense that the consumer
demand and consumption of goods is the chief component and driving factor behind a
business cycle. A business cycle refers to the aggregate of the demand and the consumption
for finished goods within a delineated period. The business cycle does not take into
consideration the demand for raw materials twice; it only calculates the end product that is
manufactured using the raw material. The only time that the raw material is included in the
business cycle is if the raw material was not used for production within the business cycle
under review. For instance, if cookies were produced during the business cycle, the flour,
sugar and other ingredients used in baking them will not be included as well as the cookies.
The business cycle and the real GDP are used to calculate the growth of the economy.

11