# Regression Analysis On National Income

Regression Analysis On National Income

## Abstract

The study investigates the regression analysis of national income and government aggregate expenditure in Nigeria by testing the validity of Wagner’s law and Keynes’s hypothesis for the period between 1970 and 2014. More specifically, by applying time-series analysis, government-spending and national-income variables were found to be non-stationary and cointegrated, thus satisfying a long-run equilibrium condition. In addition, through the application of Granger causality tests to error correction models, unidirectional causality, running from gross domestic product to government-expenditure variables, could be established between the variables and, therefore, only Wagner’s law was found to be valid in Nigeria’s case for the period of study.

## Chapter One

### Introduction

National income is the sum of the money value of all the commodities and services produced in a country within a particular period of time usually one year.

The question of how an economy grows could come to mind at this juncture. It the amount of goods and services produced by an economy increases. If it does not increase yearly, it is not growing, even if it is growing, the rate of growth may not be uniform among years. Therefore it may not be possible to determine the condition of the economy.

In any case, an economy needs an indicator for measuring economy growth, this indicator is the monetary summation at all the commodities and service produced in an economy within a particular period of time usually a year.

To get national income of a country like Nigeria for instance, we take the list of the goods and services produced in the country during the year, assign values to them and add up. If we can do this year after year, we shall be able to make comparison of activities of Nigeria year after year. Then we can decisively determine whether the economy of Nigeria is growing, declining or stagnant. It is growing if the National income increases year after year, declining, if the National income is decreasing and stagnant it there is no difference in the National Income for years.

In measuring National Income, an indicator called Gross Domestic Product (GDP) is used at current price. It is therefore quite important here to point out the role that prices could play in the measurement of National Income. Prices of goods and services changes from time to time. These changes can affect any attempted estimates. Considerably. Therefore to get an idea of the real physical change in National Income from year to year, effect of price changes must be removed.

National Income should be measured in real terms and allow for changes in price levels. For instance whenever the economy experiences inflation, price rises while the quantities of goods and services may remain constant. Let us say that 2000, the total units of the go0ods and services realized in Nigeria amounted to 50,000 units and also 50,000 units in 2001. Let us further assume that the average per unit in 2000 was N10.00 while the price in 2001 was N15,000.

Nigeria’s income with GDP as an indicator for 2000 was 50,000 units X N10.00 = N5000,000 Nigeria’s income with GDP as an indicator for 2001 was 50,000 units X N15.00 = N750,000.

If the two figures were presented to a layman as final products of overall estimates for 2000 and 2001, he would be tempted to say that the National income for 2001 was higher than that of 2000. This is so monetarily but really the income for both year are equal. The difference in value was due to rise in p rice in 2001 while the quantities of goods and services were the same in both years.

The same thing can be applicable when a country experience deflation or depression. Therefore in measuring national income for different years using gross domestic product as an indicator effects of price changes must be given the normal due. In so doing the changes in economy can be determined appropriately.

#### Statement of Problem / Motivation

As a result of poor economic condition in Nigeria relevant information is of great interest to me for investigation if viable economic solution can be revealed.

Nigeria considered as one of the third world countries is been assessed by their income yearly. It is a simple logic of our living that it country’s income is high with considerable population, the enjoyment of the citizens of that country would be high, while the enjoyment is low with low national income. It is on this point that I find it very expedient to analyze the national income of Nigeria and make necessary recommendation for the improvement of the economy for the betterment of the citizenry.

#### Aims and Objectives

In view of Nigeria’s economic predicament, the project is aimed at investigating the relationship existing between disposable income, savings and government final expenditure for the purpose of suggesting solutions to our economic problems.

After the regression analysis had been carried out, it will supply solution to the following questions:

1. Is any linear relationship between the variables listed?
2. How reliable is our regression coefficient?
3. Can we predict the future value of dependent variable?
4. How reliable will be our estimate?

#### Scope of the Study

The study is centre on “National Income, Savings and Government Final Consumption Expenditure Covering the period of six years 1998 – 2003.

The raw data used are collected as primary data by federal office of statistics” publication and Federal Ministry of Finance Publication. The data are collected as primary data by federal office of statistics and used as secondary data in this project which centered on national Accounts. Some of these National Accounts Aggregates Include Gross Domestic Product (GDP) final consumption expenditure, exports and imports.

National Accounts data presents the record of economic transaction of the economic in a systematic manner and show the relationship between the various components of the economy. Economic transaction cover all the activities of an entity (Household, government, firm, financial institution) that are of economic nature (production, consumption distribution, savings and foreign exchange transactions. These economic transactions of all the entiti8tes and combined together ad presented inform of account.

Data collected for analysis in this study center on:-

1. Appropriation of disposable income as dependent variable.
2. Savings as one of the independent variable
3. Government final consumption expenditure as another independent variable.

#### Significance of the Study

The study will help to know the status of Nigeria economy. The knowledge of the status will help to make necessary recommendation in order to revitalize the poor economic condition of the country for the better future.

The study will also create avenue for future research.

#### Definition of Concepts

##### Gross Domestic Product (GDP):

This is the sum of the money value of all locally produced goods and services. It does not include international transaction. GDP does not make allowance for depreciation of capital.

##### Gross National Product (GNP):

This is the total money value of current market prices of all final goods and services produced by the nationals during a specific period. It includes net income from abroad in respect of the country’s nationals without any consideration for depreciation of capital.

##### National Domestic Product (NDP):

This is the total value of all goods and services produced in a country in a period of time. It exclude the value of the net earnings and incomes from abroad. An allowance being made for depreciation of capital.

##### Net National Product (NNP):

This is the monetary value of all goods and services produced within the country during a specific period. It includes net incomes and earning from abroad and provision being made for the replacement of depreciation of capital.

##### Disposable Income (DPI):

This is the amount of money per year that private sector are free to spend when depreciation of capital, all taxes, all net profits made by firms but not paid out as divided are added to the disposable and transfer payment subtracted. We arrive at gross national product.

##### Net Economic Welfare (NEW):

This examines those factors not considered when calculating the Gross National Product (GNP). Such factors include social cost 9pollution) and leisure time the net economic welfare tend to remove the product (GNP). A nation might have a very high GNP at a very great social cost as pollution, rising crime etc.

##### Per Capita Income (PCI):

This is the gross domestic product divided by the population of the country. Per capita income can be calculated once the population and gross domestic product are known. So that P.C.I = GDP

## Chapter Five

### Conclusion and Recommendation

In an attempt to investigate the relationship between GE and national income in Nigeria, in order to verify whether or not Wagner’s law and/ or Keynes’s hypothesis hold for the case of Nigeria it was found that there exists a long-run equilibrium relationship between the variables and that unidirectional Granger causality, running from GDP to government-spending variables, could be established between them. Therefore, only Wagner’s hypothesis is found to be valid for Nigeria. The outcome of the result might be due to a general decline and inadequate GE on critical sectors of the Nigerian economy. The direction of government spending over the period studied might also be a factor for the non-existence of the Keynesian hypothesis as huge percentage of recurrent expenditures and embezzlement of budgeted funds has been a bane militating against economic growth in the economy. GE has been widely viewed as a tool to stimulate economic growth especially for developing economy.

The outcome of this and other related studies would inhibit the use of GE as a fiscal policy tool for economic stabilization by policy makers. It would also be judicious to realize that Wagner’s proposition implies that with economic growth comes a bigger role for government, not the other way around. Policies whose sole aim is to increase the role of government may in fact cause the opposite results, hence the need for caution and responsibility in determining where and how much government intervention is needed to complement other growth-generating policies.

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