ARBA MINCH University

ARBA MINCH UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS
THE DETERMINANT OF HOUSEHOLD CONSUMPTION

IN SHASHEMENE TOWN: Using Micro Data
A RESEARCH PAPER SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF BACHELOR OF ART DEGREE (BA)
IN ECONOMICS.
BY:
DEREJE SHIMELIS
ID. No: RBE/223/07
ADVISOR: TEKLEBIRHAN A. (MSc)
June 2017
Arbaminch, Ethiopia
CERTIFICATE OF EVALUATION
This to certify that student, Dereje Shimelis ID.No.RBE/223/07 has conducted his senior essay
research entitled the determinant of household consumption level in Shashemene town in
estimation of micro data. This work is completed with satisfactory evaluation of the advisor and
examiner as per the requirement of the university.
BY
DEREJE SHIMELIS
Approved by
Advisor;-------------------------------Signature---------------------------------Date-------------------------
Examiner-----------------------------Signature---------------------------------Date-------------------------
ACKNOWLEDGEMENT
First of all I would like to thank JESUS CHRIST with his Mother ST-MERRY because they are
a base for whom I am today for doing all these and make my dreams start a journey of success.
Secondly, I am greatly indebted to my advisor Teklebirahan .A (MSc) for his valuable guidance
and advice throughout the research work.
Let me say in my words ‘mom all these are by and for you. Thank you very much for everything
you did in my life.’ I also owe to my Dad, brother, and my uncle for their potential help during
my life in university. I wish to express my special thanks to Demeke, Birhan, and Eramo who
have been provided me with materials during the research work and respondents for their active
participation in the study.
Finally, thanks to all who wish my success!
i
Table of contents
Contents page
Acknowledgement..............................................................................................................................i
Table of contents............................................................................................................................... ii
List of table ............................................................................................................................ iv
List of figurennnnnnnnnn ................................................................................................................. v
Abstract…….....……………………………………………………………………………………………………………………..v
CHAPTER ONE ............................................................................................................................... 8
1. INTRODACTION......................................................................................................................... 8
1.1 Back ground of study ........................................................................................................................ 8
1.2 Statement of the Problem .................................................................................................................. 10
1.3 Objective of the Study ...................................................................................................................... 12
1.3.1 General objective ....................................................................................................................... 12

1.3.2 Specific objective ....................................................................................................................... 12
1.4 Significance of study ........................................................................................................................ 12
1.5. Scope of Study ................................................................................................................................. 12
1.6 Limitation of the study ...................................................................................................................... 13
1.7 Organization of the study .................................................................................................................. 13
CHAPTER TWO ............................................................................................................................ 14
2. Review of Literature ................................................................................................................... 14
2.1 Review of Theoretical Literature ...................................................................................................... 14
2.1.1 An Evolutionary Theory of Household Consumption Behavior................................................ 14

2.1.2 Theories of Consumer Behavior ................................................ Error! Bookmark not defined.
2.2 Review of Empirical literatures ........................................................................................................ 18
2.2.1 Static Theory of Consumption Behavior ................................................................................. 18

2.2.2 Life Cycle/ Permanent Income Theories ................................................................................. 18
CHAPTER THREE ........................................................................................................................ 22
ii
3. Methodology of the study ............................................................................................................ 22
3.1. Description of the study area ........................................................................................................... 22

3.2. Data type and sources ...................................................................................................................... 23
3.3. Sampling and size determination ..................................................................................................... 23
3.3.1 Sampling Technique .................................................................................................................. 23
3.3.2. Sample size ............................................................................................................................... 23
3.4. Model specification and estimation technique ................................................................................. 24
3.4.1. Variables Description and Hypothesis ...................................................................................... 25
3.5. Method of Data Analysis ................................................................................................................. 27
CHAPTER FOUR .......................................................................................................................... 29
4. Discussion and Data Analysis ...................................................................................................... 29
4.1. Descriptive Analysis ........................................................................................................................ 29

4.1.1. Description Determinant of Consumption on survey based approach ...................................... 29
4.1.2. Consumption expenditures........................................................................................................ 34
4.1.3. Household investment plan ....................................................... Error! Bookmark not defined.
4.1.4. Dependency ratio and self sufficiency ...................................................................................... 36
4.1.5. Households occupation. ............................................................................................................ 38
4.2 Econometrical analysis ..................................................................................................................... 39
4.2.1 Determinants of household consumption behavior .................................................................... 39
4.2.2 Different Tests ........................................................................................................................... 39
CHAPTER FIVE ............................................................................................................................ 44
5. Conclusion and Recommendation ................................................................................................... 44

5.1 Conclusion ........................................................................................................................................ 44
5.2 Policy Recommendation ................................................................................................................... 45
References ...................................................................................................................................... 46
Appendix 1............................................................................................. Error! Bookmark not defined.
Appendix 3..................................................................................................................................... 48
Appendix 4 ..................................................................................................................................... 48
Appendix 5............................................................................................. Error! Bookmark not defined.
iii
List of table
Table 3.3.1:- Summary of explanatory variable and their expected sign ------------------------
Table 4.1 Family size of the household---------------------------------------------------------------
Table 4.2 Composition of HH Head’s Age and Education Level ---------------------------------
Table 4.3 Response on household saving status------------------------------------------------------
Table 4.4 Demographic composition of sex----------------------------------------------------------
Table 4.5 Percentage share of expenditure with sample size of 156-------------------------------
Table 4.6 Response about Investment-----------------------------------------------------------------
Table 4.7 Response about Sufficient Income to Cover Consumption------------------------------
Table 4.8 Response about on household’s occupation------------------------------------------------
Table4.9 Regression estimate of coefficient associated with determinant household consumption-

-----------------------------------------------------------------------------------------------------------------
iv
List of figure
Fig 4.1 Income of respondents ------------------------------------------------------------------------
Fig 4.2 Household consumption expenditure---------------------------------------------------------
v
ACRONYM
HH___________________________________ Household
MLRM________________________________ Multiple linear regression model
CSA__________________________________ Central statistical agency
OLS___________________________________ Ordinary least square
FYGTP________________________________ Five year growth and transformation plan
MoFED________________________________ Ministry of finance and economic development
vi
ABSTRACT
This study is conducted with the general objective of investigating the determinant of household
consumption in oromia region, shashemene town. The data for the study was collected both
primary and secondary data. Primary data was collected from 156 sample households through
structured questionnaire. Simple random sampling techniques with purposive was used to select
households. Simple statistics and econometric analysis is employed to analyze the collected data.
Multiple linear regression model and OLS estimation procedure is used in the econometrics part.
The study found that household consumption level in the area is affected by disposable income
and family size positively, and saving status, and age of the household head negatively and
significantly. From this recommendation, household with large family size indicate the need to
ensure appropriate implementation of family planning program, creating awareness through all
means of Medias on negative impact of large family. On the other hand, during consumption
expenditure, households are better to use their own note book, household give more attention for
consumption than saving it needs a vast investigation on household consumption by enhancing
saving habit of the household, awareness should have given to the household to save some part
of their income and reducing the extravagant and cultural habit, the household promote the
saving habit in the formal institution enhance the town development by engaging in to investment
activity for the near future.
vii
CHAPTER ONE
INTRODUCTION
1.1. Back Ground of Study
All around the world, understanding of concept of consumption is very important for overall
economy. Consumption is simply defined as the total demand for consumer goods and services.
Anyanwu (1995) and Frank and Bernanke (2001) defined consumption as the spending by
households on goods and services such as the clothing, food items, entertainments, health
services and acquisitions of assets among others arising from this definition is the concept of
consumption function which shows the relationship between consumption and disposable
income. The term consumption originates from lord Keynes psychological law which says that
men are disposed as a rule and on the average increase their consumption as income increase but
not by as much as the increase in their income. This law is known as the absolute income
hypothesis (AIH). However, further investigation in to the determinants of consumption
expenditure has revealed that consumption expenditure is determined by many other factors
aside income. Colander (2001), Koutsouyiannis, (2001).Most business activist in the world is
aimed at providing goods and services for consumption Denburg (1985). The value of goods
services that a family consumes defends almost entirely on its income and wealth. Americans
spend more than 95% of their after -tax income on consumer goods and services. About 2/3 of all
the goods and services that produced in USA in each year are used by consumers. The
remaining1/3 is used by the government or invested in buildings, manufacturing machinery,
other forms of capital in America, or other countries of world (Henry, 2001)
Among several key macroeconomic variables that determine aggregate output consumption
appears to be an output determining variable that has attracted a lot of attention and studies. As
one of the fundamental components of GDP and GNP and a major variable for measuring
economic growth, consumption expenditure and the nature of consumption have engaged much
of the macroeconomics debate dating back to John Stuart Mills and the classical economist of the
18th and 19th centuries. This is so because Modigliani, James Duesenberry, Simon Kuznetsetc in
the early to mid 19th century. This is so because consumption expenditure account for about 2/3
of aggregate expenditure in virtually all economies (Branson, 2000).
8
Neo classical economist (main stream) generally consider consumption to be the final purpose of
economic activity and thus, the level of consumption per person is viewed as a central measure
of an economy`s productive success (Denburg, 1985).
In modern term household consumption previously defined 70 to 80 percent of total national

expenditure. Even in western capitalist countries, a significance part total consumption is
determined by expenditure of public authority. (McHenery, 1768)
Obviously, 85% of total population of Ethiopia lives in rural area and practicing in agriculture
sector with subsistence farming system. Compared this production system with its population
growth rate, It is difficult for each household head to feed his or her family. Generally in
Ethiopia including Oromia region the household consumption behavior is in the lowest level this
is because, since most people in Ethiopia produced agricultural products and these products are
both price and income inelastic the return from such type of production is very low. (Workneh
negate, 2003).Part of the diversity in consumption pattern across Ethiopia can be explained by
the variation in rural and urban livelihoods. Due to the inherent characteristics of livelihoods in
urban areas, urban consumption pattern are expected to be more dynamic than in rural areas. One
such inherent characteristics of urban consumption is that it is highly monetized and sensitive to
relative price and supply change. Moreover, consumption pattern are likely to change more
quickly in urban areas due to the relativity increased exposure of urban areas to changing global
consumption patterns. (Tafere et al, 2009). In addition to location and agro ecological difference,
ethno cultural difference may also explain difference in consumption pattern across Ethiopia.
Major regional boundaries in Ethiopia have been drawn largely on the bases of ethnicity. Overall
regional consumption may vary depending on income and poverty level. For example, HICE
data indicate that real per capita consumption level are highest in Addis Ababa, followed by
Harare and Dire Dewa, and with Amhara, Oromia, BenishangulGumuz, and Somale being the
region with the lowest consumption levels between 1995/96 and 2004/05 (MoFED, 2008).
In all aspects of household faces problems to satisfy their needs. Because individuals are live in
the incomplete world. Therefore, the household consumption behaviors in the world, continent,
and country even at region level are different. Due to variation of income and other variables
among nations and people in the world when individuals household income increase,
consumption and saving also increases and vice versa. It implies that consumption is determined
9
by household income. (Sitotaw and Nigus,2005).Thus owning this fact an empirical investigation
on the determinant of household consumption levels of shashemene town using micro analysis.
1.2 Statement of the Problem

Theoretically, there are many different factors which determine the growth of the overall
economy of the country. Among these, the most important determinant is consumption of the
households. Even though, ZelalemTesfaye (2005), tries to analyze a study on household
consumption expenditure in Addis Ababa city, he analyzed by considering household income
and family size as main determinants of household consumption behavior. But this study would
need more explanatory variables that determine the consumption behavior of the household.
Then the study wants to search other variables that determine the household consumption level,
those variables are occupation, dependency ratio and sex of the household head. This initiated
the study to conduct a research on household consumption behavior. Since household
consumption is the major determinant the overall economy. It has attention of both micro and
macro economists interested in household behavior on the behavior of aggregate consumption in
explaining aggregate function (Mankiew, 2000). Naturally, each household save and invest their
income after consumption completed. It implies that the level of consumption tees us level of
saving. Consumption and investment has and negative relationship.
According to Harood and Domar saving or investment are almost proportional and affected by
consumption level. This leads to conduct a research on household consumption level. Specially,
least developed countries like our country Ethiopia, household are more interested on
consumption than investment. Thus the consumption level of household can determine the
investment level of country. Then government of country are interested to design polices and
strategies to overcome such problems. So, from this perspective it initiated to conduct a research
on household consumption in Shashemene town.
The level and distribution of poverty in Ethiopia is extensive. According to 2010/2011

household income, consumption and expenditure survey by central statistical agency authority
(CSA) report from total population 54%of rural and 37 % of urban area are found to below
poverty line. To overcome such problems government has prepared its poverty reduction
program and also unveil “Five Years Growth and Transformation Plan “(FYGTP2) on October
2016.To achieve these programs according to their planed time frame work, initially knowing
10
household consumption expenditure is very important. This initiates the study to conduct on
household consumption level.
The following gaps motivate the author to carry out this study;
1) All studies identified above did not emphasize the determinants of consumption in the
study areas. Hence this paper aims at bringing this gap by examining the determinants of
consumption in the shashemene town in Oromia region west Arsi zone.
2) This study is motivated by the need to gain a better understanding of how socio economic
factor influence household consumption expenditure in shashemene town, taking in to the
above mentioned lack of research conducted on consumption expenditure. Therefore, by
attempting systematically to fill this gap to some extent; this explanatory analysis
intendeds on revealing the relationship among consumption expenditure and selected
variables.
3) All studies identified above used few variables as a determinant of household
consumption, but this study used some other variables like, occupation, dependency ratio,
sex and socio-cultural factor that determine household consumption. Those reason above
initiates the author to carry out this study.
In general this study will attempt to answer the following major questions concerning the
determinants of household consumption level in Shashemene town.
 Which Socio-economic factors more determining household consumption in

Shashemene town?
 How the demographic factors affect consumption level in Shashemene town?
11
1.3. Objective of the Study
1.3.1. General objective
The main objective of this study is to analyze the determinant of household consumption using
micro analysis in Oromia region Shashemene town.
1.3.2. Specific objective
 To examine the demographic factor of household consumption level in Shashemene

town.
 To identify which socio-economic factors are more determining household consumption
level in shashemene town.
1.4. Significance of study
The main significance of the study is to provide information and frame work to residents of
Shashemene town about their, consumption, pattern and factors determining their consumption
level. The findings of the study may initiates other interested bodies to undertake a better and
detailed study in this area, and it may also draw attention of researchers to the importance of
understanding and knowing the determinants of household consumption level to help in
designing policies and strategies for future development of the country and welfare of the society
as a whole.
1.5. Scope of Study

A household consumption behavior analysis involves a range of activities, which needs ample
time to cover all details; it requires understanding the resource base of a particular area in
relation to particular group of people. Moreover, the household consumption are numerous, and
vary from household to other. Likewise, factors that affect household’s consumption also varies.
However it is difficult to exhaust all consumption levels and factors influencing household
consumption so, the study confine itself to the major and common ones, which are found to be
relevant to the topics and research area. In line with this, for reasons associated with time and
resource, the scope of the study is limit on three selected kebeles in Oromia region of
Shashemene town.
12
1.6. Limitation of the study
The researcher faced obstacle which is difficult to accomplish the paper successfully. The study
has been more comprehensive if it is clear from limitation. Since, a shortage of time was
unquestionable to be the main obstacle to the research. Others like budget constraint to cover
transportation to the study area, lack of computer and internet access and shortage of adequate
data necessary for the study. Despite above difficulty, the researcher uses maximum effort to
accomplish the research paper comprehensively.
1.7. Organization of the study
The study is organized in to five chapters. The first chapter is the introduction part, which
consists of background of the study, statement of the problem, objective of the study, scope of
the study, significance of the study, and limitation of the study. The second chapter is the
literature review that consists of both the theoretical and empirical literature reviews. The third
chapter is deals about the general methodology of the study. The fourth chapter would provide
the descriptive and econometric analysis. The last chapter of the study is including the
conclusion of main finding and recommendation forwarded by the researcher
13
CHAPTER TWO
REVIEW OF LITERATURE
2.1. Review of Theoretical Literature
2.1.1. An Evolutionary Theory of Household Consumption Behavior
The Study Propose the following general theoretical formulation, while not yet fully fleshed out,
has the promise of bringing many aspects of consumer behavior which encompass of a
behavioral and evolutionary economic theory.
Regarding the objectives and satisfaction sought by household in their purchase of goods and
services, as we have noted a number of empirical studies indicate strongly that the idea that
household have a well defend coherent general utility function cannot hold water. In its place we
assume that a household has asset of particular wants it attends and that the goods and services it
purchases are intended for use in meeting those wants. The study also assume that households
can judge at least roughly whether particular wants are being met, or if wants satisfaction is a
matter of degree, to assess with some consistency whether a particular want is being met better
or less well in one situation as compared with another. In contrast, the study propose that, while
not strictly random, once basic levels of wants satisfaction are met, households can have
difficulty in judging whether they are better or worse off when one wants is met better and
another less well than in an earlier situation, and their evaluation of this can be in
consistent.(nelson and David, 2010)
This formulation obviously departs from the view in standard neoclassical economics that sees
households as having stable well-defined utility functions and acting as “utility maximizers”. On
the other hand, the formulation is consistent with the view of households as trying to meet their
perceived needs and wants as well as they can give what they know or believe. Although,
households are seen more confident and consistent about how to meet particular wants better or
worse than they are about the tradeoff involved in meeting different wants to different degrees.
Obviously, some wants are partly basic and biological. But even in primitive societies, the range
of that are attended goes far beyond anything that is closely linked to biological needs. And the
14
customary ways meeting different want, even basic wants, differ greatly across societies. It is
clear that both the wants that households attend, and the standard means of meeting, are strongly
shaped by the culture surrounding a household, and with which its members grow up. But, it also
clear that there are significant differences across households with in a given experiences,
circumstances, and other idiosyncratic elements.
Household consumption behavior obviously operates under a set of constraints. Putting cultural
bounding and the limits and requirements set by individual household idiosyncrasies aside for a
moment, household purchases of the goods and services used in their activities to meet wants are
limited by two other kinds of constraints. One is the budget constraints of standard consumer
theory. Many years ago wisely Mitchell, in the famous article “the back ward art of spending
money” (1992) despair that many households had little idea as to how to use their budget
effectively.
The second constraint stems from the fact the household consumption activities take time. More
or less time can be spent sleeping or earning income. People can be hired to perform a variety of
services. Thus, the time constraint for many households contemplating things they would like to
do and can afford financially is lack of time to do them.
The study make three non-trivial assumptions regarding the activities a household uses at any
time to meet want. The first is that particular activities are specialized to particular wants. This
assumption does not imply that particular consumer goods and services can be used to meet only
one want some might be used in several activities but rather that the activities specialized. The
second is that at any time a household employs a small number of activities to meet any
particular want they attend. The employment of more than one activity to meet abroad want
permits some variety. The same dinner every evening can be boring. On any Saturday a
household may contemplate going to a movies apply or a concert. However, for the reasons we
argued earlier, a household tends to commit to a limited pattern of variation in the activities
customary used to meet a want as largely a matter or routine.
Third, once a collection of activities to meet a particular want is established by a household, and
a routine of variation within that se, the study assume that changes in balance of variation within
that collection is much easier for it to effect, or even contemplate, than adding new and
15
unfamiliar activities. The latter requires that the household contemplate doing things as a new
way, and this studies assume requires more conscious pondering than simply doing a little more
of this and a bit, less that. Activities are defined in terms of their basic action patterns, the
inputs they employ.
In some but not all of the following discussion, the study assume that activities can be employed
at various levels. Under this specification, the greater the level of use of an activity the greater
the degree of fulfillment of the want it services, and the more the inputs it employs.
As evolutionary economic theories the study, recognize that household consumption behavior is
never completely static. The circumstance influencing consumption behavior always includes
some new elements. Children get older and adults too. Accidents and illness occur. Old friends
move and new ones are made. Ideas are generated for new things to do. These kinds of changes
always are going on, even of income and prices are constant. However, we think the concept
household consumption equilibrium is a use full one as a bench mark for analysis of household
response to change condition and perception, and we define such concept below.
Household consumption equilibrium involves, first, a set of wants it is attending and a want
satisfaction target for each. Second, a collection of activities and activity levels it is using to meet
each want, and a customary balance among the several. Third, purchases of inputs associated
with those activities and third differential employment. In equilibrium, the mix of activities and
their levels, and how the household organizes its activities, just meets want satisfaction targets,
and the purchases of inputs fit within the household’s budget and time constraints with little
slack. And of particular importance the household has no tendency to changed circumstance, or
changes are the thing it knows or believes (Nelson and David, 2010).
2.1.2. The Permanent Income Hypothesis

This hypothesis is primarily developed by Milton Friedman (1976) winner of prize in university
of Chicago, Friedmans’s point of view is the rejection of the usual concept of current income and
its replacement with permanent income. A household permanent income in any one year is in no
sense indicated by its current income to be received over a long period of time, stretching out
over a number of future years. Friedman puts this permanent income is to be interpreted as the
16
mean income regard as permanent by the consumer unit in question which in turn depends on its
horizon (Dornbush, 1975)
Households measured or observed income in any particular year may be larger or smaller than its
permanent income. Friedman divides the households measured yearly income into permanent
and transitory income, so that is measured income is large or smaller than its permanent income
depending on the sum of positive and negative transitory income components. In the same way,
Friedman divides measured consumption in to permanent and transitory components. A good
purchased because of an attractive sale price or a normal purchase deferred due to unavailability
of the good are examples of positive and negative transitory consumption (Mankiew,2000).
2.1.3. The Life Cycle Hypothesis

This hypothesis developed by Franco Modgliani (1985) a novel prize winner in economic
science. It is like Friedman’s permanent income hypothesis in that the individual consumption in
any given time period does not depend on to a significant degree on his income during that
period but depends on value of expected income wealth.
The life cycle hypothesis is based on the argument that the rate of consumption in any given
period is a facet of plan, which extends, over his life cycle, although his income displays a quit
different pattern over the same year.
According to him, age structure of the population is an important determinate of consumption

pattern of different households in the economy. Consumption over some one’s life time cannot
exceeds his life time income unless that person is born wealth then according to Franco
consumption spending is financed by life time income and wealth.
One important reason that income varies over a person life is retirement. Host people plan to stop
working at about age 65 and expect their income to fall when they retire. Yet they do not want
large drop in their standard of living, as measured by their consumption. To maintain
consumption after retirement, people must save during their working years (Mankiew, 2000).
Based on the life cycle hypothesis, when a household enjoys an increasing or decreasing in
income, there will be little effect on consumption.
17
2.2. Review of Empirical literatures
2.2.1. Static Theory of Consumption Behavior
The empirical analysis of household consumption behaviors pioneered by the work of Engel.In
the mid-19thcentury he proposed the famous law of consumption, which is formulated based on
the family budget studies of different countries.
The establishment of this law itself is thus taken as the first significant quantitative approach
contributed to the field.
In addition to this ZelalemTesfaye, (2005), analyzed household consumption behavior in Addis

Abeba by using 871 HHs as a sample size with simple random sampling technique. His
methodology was both descriptive and econometrical. The variables that he used as explanatory
were HH income and family size. Accordingly, both explanatory variables affect HH
consumption positively. As mentioned in his paper subsequent studies by Bemnet and Woliams
(1996) using this law of consumption have proved that the share of food consumption in poor
countries is higher than that in rich countries and even with in a country it declines over time as
its national income raised. Several studies were also attempted to drive generalization about the
other categories of consumption, particularly for housing and clothing but the result lack
harmony by themselves to provide a universally accepted law like the one for food. Based on the
result obtained from Houthakekr (1957) employed the log liner model to estimate the income
elasticity’s for food, clothing and housing. Based on the result obtained from his study of
international comparison of consumption behavior, and by analyzing the evidence from earlier
studies, he reached the conclusion that income elasticity of food, clothing, housing and other
expenditures is 0.6, 1.2, o.8 and 1.6 respectively. Since then these figure served as basis of
comparison for results obtained in later works.
2.2.2. Life Cycle/ Permanent Income Theories

This theory was heavily dominated by the Euler’s approach using this approach; Hall and Mish
kin (1982) were the first to develop a model for micro data. This model enables them to see
whether consumers are, sensitive to current flections’ in income.
18
Being the first to implement the Euler’s approach to micro economic data, they drive the
statically estimable consumption function. As a first step, they run regression of income and
consumption on socio economic variables, including the reactive price variable to identify the
deterministic components from the residual term. Then, the residuals obtained from these
regressions are used to examine the dynamic relations that are theoretically expected to exist
between consumption and income. According to the permanent income theory, in the
consumption function in which the change in consumption is regressed on residual from
permanent income and transitory income variable, the coefficient of the latter should be close to
zero.
In addition to the above explanation a standard household model, households use their resources
(example: labor, skills, land and equipment) to achieve the highest level of intended utility
(satisfaction) possible, this decision could be determined by the income levels, preference and
market price,(Ruel et al,2005). Preference also affected by the composition of households, it
members knowledge and education habit and culture norms, personal experience and by
biological factors that affect hunger. The assumption that households pool resources and have a
single, set of preferences has been questioned by research on intra household allocation of
resources and gender row with in the household. Empirical researches have shown that the
husband and wife have often unequal control over resources that they may not pool income, and
that their consumption priority may differ. Some alternative households’ modes assume a
cooperative solution in which distribution of benefit depends on the bargaining position of each
based household. In general, the consumption patterns may vary with legal and socio economic
status of each partner and their ability to monitor each other’s behavior (Ouldsumbing, 2003)
Additionally, Tadesskuma, 2010, analyzed changes in consumption patterns in urban Ethiopia,

Addis Abeba by using working – lesser demand function as a dependent variable, per capital
income and other demand factors like dependence ratio, age and family dummy as independent
variables. He used both primary and secondary data. According to his finding, age affects food
demand negatively.
The demand for high value food items (example: meat, milk vegetables and fruits) increase with
higher income. They are also expensive source of energy. This implies that poor households are
unlike to access them. This is largely because poor households prioritize to fulfill their basic
19
energy requirement to avoid hunger. This is mainly because high value food to be expensive
source of energy for them. Households with income near to subsistence level, consume large
quantities of grains and starchy staples and few fruits, vegetable, meat, milk, and milk products.
Consumer preferences on the other hand, shape the decision of consumer what to do consume or
not. Poor households, until they meet physiological need to satisfy hunger, they have little choice
but to focus on cheap sources of energy as grains and starchy staples. Once they satisfied their
basic energy needs, households start to diversify their diets by including animals’ food sources,
dairy products and fruits and vegetable (Ruel et al,2005 cited in Tadessekuma, 2010)
Most previous studies (Taddesse Kuma, ZelalemTesfaye, etc.) reached from the following
results. First, there has been considerable improvements in frequency of food consumption
between 1994and 2004. Second, Ethiopians urban consumption pattern is shifting from
traditional stable and high value food items such as milk and milk products, meat and fruits. This
change in consumption pattern is stronger in Addis Ababa than others. Among others, share of
food expenditure spent on meat has registered a radical shift from about two percent in 1994 to
13 % in 2004. This is perhaps expected to continue to increase at a significant rate if current
growth momentum of economy maintained. Third, deviation in average monthly per capital food
expenditure between the poorest and the richest is exceedingly wide. The richest group has nine
times higher per capital expenditure on food compared to poorest. Fourth, the estimated income
elasticity of demand for stable foods is significantly lower than most non- stable high value food
products. This may imply that food consumption pattern in urban Ethiopia is shifting from stable
grain commodities to non- stable and high value food products. Fifth, in addition to income, food
demand in urban Ethiopia is affected by regional and demographic variables that are Gender,
education, household size and age.
According to the life cycle permanent income of Modigliani and Brunberg (1954) and Freidman
(1957), the life time income of an individual should determine his periodical consumption.
Therefore consumption is smoothed over the life cycle depending on the expected life time
income to equalize the marginal utility of consumption over the periods. So, the economic
decision whether to consume current or acquired past income (wealth) now or to shift
consumption to the future should not be affected by changes in the current income, because these
changes are normally transitory and thus small compared to the life time income.
20
However, the assumption of the life cycle permanent income hypothesis is crucial when it comes
to reality. Firstly, it is hard to identify if the change in current income is really transitory or if
there is path dependency and lasting effect on permanent income.
Additionally, there may be difference in marginal propensity to consume out of the current
disposable income between poor and rich households because the empirical life nature fill in
regressive consumption to saving ratio. (Casperson and Metcaff, 1994).
The empirical evidence explained above indicates that the determinants of household
consumption in many areas are similar but, some socio economic factors show different effect
based on specific conditions of the study area. Even though the previous studies are so good,
they are not taken into account some determinants like household occupation, dependency ratio
and some other socio economic factors that determine household consumption level.
No studies under taken in Shashemene town to identify the socio economic and demographic
factor which determines the level of house hold consumption level. So that by taking the above
criticism in to consideration, the study worked out by adding variables like, household
occupation, dependency ratio, and other variables into this analysis.
21
CHAPTER THREE
METHODOLOGY OF THE STUDY
3.1. Description of the study area

The study was conducted in Shashemene town which is located in Oromia region West Arsi zone
of the national regional state, approximately 250 km south of Addis Abeba and 22 km from
Hawasa, the regional capital of SNNP of Ethiopia.
Geographically, the town is located at 7 degree North latitude and 38 degree longitude. The city
founded in 1903. The town obtained this name after the women called “ shashe” who used to sell
traditional drinking alcohol called “teff” and “ farso”, currently it is the capital city of Western
Arsi Administration Zone. The town has five door routes in which thousands of merchants are
enter daily. This five door routes are ; from Shashemene to Addis Abeba 250 km, from
Shashemene to Bale Robe 175 km, from Shashemene to Moyale 525 km, from Shashemene to
Arbaminch 250 km and from Shashemene to Wondogenet 18 km.
According to shashemene city administration the projected population of the city in 2016 was
reach 246,774 people, out of this 123,057 are males, and 123,717 are females. Out of the total
number of the population of the city administration 171,910 people live in urban area, while the
remaining 74,864 people live in the rural area of the administration.
The climate in Shashemene according to Bureau of planning and Economic development 2001/2
annual statistical bulletin the town has sub-tropical or locally woienadega and 15c-23c of annual
temperature and 1500-2000ml rainfall.
Shashemene is well known in different Economic activities,these activities can be broadly

categorized in to formal and informal sector. As data indicate, the informal sectors are mainly of
traditional and old form of “injera” and traditional drink alcohol like “tejj” and related activities.
Besides to these, industries, land crafts, tourism services and trade are considered to be the main
formal sector. These formal sectors have wide economic scope, wide employment opportunity
contribution to economic and social development of the town.
22
3.2. Data type and sources
To analyze the level and determinants of household consumption, the study was used primary
data which was conducted by using structured questionnaire from the 156 samples households in
three urban kebeles of shashemene town. The questionnaire was designed in such away it
provides statistical information on household demographic composition, income, family size,
education level, dependency ratio, and saving explanatory variables and other important socio-
economic variables. For this the unit of observation was the household (defined as a group of
persons eating and living together for six month of the year).
The Secondary data was collected from Shashemene town Administration Finance and
Economic development office, the Central Statistical Authority (CSA) and other relevant
documentary sources.
3.3. Sampling and size determination

3.3.1. Sampling Technique
There are two main sampling techniques in modern research study. These are probability
sampling and non- probability sampling. The study used simple random sampling techniques i.e.
purposive with homogeneous population in various aspects like, culture living standard etc. This
technique was applied to give equal chances for each unit included in the sample kebeles has
equal chance of inclusion in the sample.
3.3.2. Sample size

In Shashemene town there are ten kebeles having a total of 40,276 households (Shashemene
town administration 2016). From ten kebeles of the town, three kebels are selected purposively
as a sample; those are Abosto with 3479 household, Didaboke with 2992 household, and Arada
with 3141 household. These selected due to the intensity of the problem, and the kebeles were
selected by their accessibility, and in order to determine the sample size of each kebeles the
formula used is Yeman (1967) .T formula.
n = N/1+N (e)2 where; N= total household
n= sample size e= level of precision
23
The total number of households in three kebeles will be used to determine the sample size.
n=9,612/1+9,612(0.08)2 = 156 sample

Sample size from Abosto kebele= 3479/9612*156= 56 households
Sample size from Didabo kekebele= 2992/9612*156= 49 households
Sample size from Arada kebele= 3141/9612*156= 51 households
3.4. Model specification and estimation technique

In order, to capture the Determinants of household consumption behavior in Shashemene town,
the model is specified as follows;-
lnCT =β0+ β1ydi +β2 Ni+β3Educi+β4Agei+β5sa + β6odf +β7depr+β8sex+Ui
Where; Ct = total household consumption per month
Yd =household disposable income per month
Famsiz =household family size
Educ =education level of household head: educated=1, 0=otherwise
Age = age of household head in year
Sa = household saving status: yes=1 no=0
Occup= occupation of the household head
Depr= dependency ratio
Sex= sex of the household head: male=1 female=0
Ui =error term
Bi=coefficient of explanatory variables
B0 =autonomous consumption or constant
Ln= elasticity (logarithm)
Theoretically, there are various econometric method (estimation) techniques which obtain
numerical values of estimates of parameters such as ordinary least square (OLS), maximum
24
likely hood and method of moments, and so on. Among these methods this study was used
ordinary least square (OLS) method to estimate the above model. OLS is the most commonly
used estimator in econometric analysis, because ordinary least square (OLS) has some optimal
properties than other potential estimators. When ordinary least square (OLS) is used to estimate
data with qualitative variable the resulting model is linear. That means the dependent variable
and the independent variable have linear relationship. In this study the dependent and
independent variables have linear relationship.
3.4.1. Variables Description and Hypothesis

Dependent variable
Total household consumption (Ct):- It is the sum of all expenditure of household to satisfy
their wants. It is continuous variables with the following expenditure components:-
 Expenditure on food and drink (cereals, vegetables, fruits, milk and milk product).
 Expenditure on culture and social (expenditures on different ceremonies, contribution on
idir).
 Expenditure on education.
 Expenditure on miscellaneous (water bills, electricity bills, telephone bill including
mobile card payment).
Independent variables:
Household disposable income (Yd); is the income after tax (net income of household from
different source of income). It important as it determines how much can be spent on various
needs of the household. According to Bemnet and Woliams (1996) found that the expected
variable income is to have a positive effect on household consumption. So, in this study expected
variable income is to correlate positively with household consumption.
Family size (Famsiz):- It is the total numbers of household members and the sole source of
labor in urban area, household with large family size in adult equivalent will have more number
of than household with small family size. Therefore household with large families are expected
to consumption expenditure is higher than that of small family size. According to Zelalem T.
(2005) found that the expected sign of family size is positive that determine household
25
consumption expenditure. So, family size in this study is hypothesized to have a positive
relationship with household consumption.
Age of household head (Age):- Profile may also be important. The age is selected as an
explanatory variable as both older and younger people are assumed to have difference in both
degree and type of needs or requirements. Therefore, the age of the household is included in the
model. Age might increase or decrease spending in the sense that younger house hold may be
pushed to spend more while the older household with increased knowledge might spend less.
The opposite could also be true. According to Tadesse. K (2010) found that the expected sign of
age is positive that determine household consumption expenditure. So, in this study variable age
is assumed to have a positive impact on the household consumption expenditure.
Education level of household head (Educ):- could measure the household’s human capital. The
level of the education of each household head is included in the model as a dummy variable (1
for formal educated and 0, otherwise). According to (Yin et al, 2005) have found that better
educated people tend to spend more; Household heads with different level of education may have
different knowledge and perception thus a different consumption basket. So, in this study
Education is therefore, hypothesized to have a positive effect on household consumption
expenditure.
Saving status of household (Sa):-Is deposited income after consumption. It considered in the
model as dummy variable 1= for saver, 0= for non saver. According to ZelalemTesfaye (2005)
found that, the expected sign of the variable saving is expected to have negatively relates with
household consumption expenditure. So, in this study, saving status is hypothesized to relate
with household consumption negatively.
Occupation of the household head (Occup-hh):-The variable indicates in which sector of the
economy is the household head currently working. The household head is considered to be
engaged in one of the following occupation: - civil servant, daily laborer, informal business
activity, formal business activity, NGOs, pensioner, and no source of livelihood. All this
variables are dummy variables. Household head with civil servant, formal business activity, and
NGOs worker are more likely to be their consumption expenditure. Therefore, this variable is
expected to have positive effect on consumption of the household.
26
Dependency ratio (Depr);-The dependency ratio is calculated as the ratio of the number of
family members not in the labor force (< 15 year and 65+) to those in the labor force in the
household. The more the dependent member in the households the more the household will be
higher consumption expenditure and vice versa. According to Taddesse kuma (2010), found that
the expected sign of the dependency ratio is positive relationship with household consumption
expenditure. Therefore, this variable is expected to have positive effect on the consumption of
the households.
Sex of the household head (Sex);are important to consider as explanatory variable as the head
play a primary role in services and goods purchasing and could influence consumption pattern of
a households. So, sex of the household is a dummy variable (equal to 1 if male, otherwise 0).
According to Taddesse Kuma (2010, found that the expected sign of sex is expected to have
positive with the household consumption. So, in this study the variable is hypothesized to relate
positively to household consumption spending. The assumption is that the head of the household
is the primary decision maker and men have more access and control over vital consumption
expenditure than women because of many socio cultural values and norms.
3.5. Method of Data Analysis
After gathering information based on the above coding system, it can pictured out in available
graph (pie chart).
For econometrical analysis, the study concentrated on the variables, such as, household
disposable income(Yd), household family size (Fam siz), age of household head (Age),
household head education level (Educ) and total household saving status (Si) as explanatory
variable and total household consumption (Ct) as dependent variable using ordinary least square
(OLS) estimation method. Additionally, t-test (variable significant), prob> F, multicoliniarty and
hetrosecdacticity problems were tested. This estimation worked out with help of STATTA
software application program method.
27
Table 3.3.1:- Summary of explanatory variable and their expected sign
No Variable name Short name Description Expected sign
1 Income Yd Income of household Positive
2 Family size Fam siz Total number of household Positive

member
3 Education level Educ-hh Educational level household Positive
head
4 Age Age-hh Age of household head Negative
5 Saving status Sa Household saving Negative
6 Occupation Occup-hh Occupation of the Positive

household head
7 Dependency ratio Depr The number of family Positive/negative
member not in the labor
force (<15years and 65+)
8 Sex Sex-hh Sex of the household head Positive/negative

Source; author computation from 2016/17
28
CHAPTER FOUR
DISCUSSION AND DATA ANALYSIS
4.1. Descriptive Analysis

4.1.1. Demographic profile of respondents
Most of the time, market price of a commodity and income (budget) of a household considered
as a major determinants of household consumption. But broadly thinking, there are many other
important determinants of consumption that we have seen in day today activity of purchasing and
consuming different consumption and none consumption commodities. These are government
tax, family size, income of household, weather condition, education level, sex, age of household
head, preference, saving of household and other different demographic factors, among these and
other factors of consumption the following are considered as major consumption determinants in
this study.
Family Size (Famsiz)
It is the total numbers of household members and the major determinants of consumption next to
disposable income. This is because; It is mostly related with human needs and wants. Household
consumption in relation with needs can be differing according to age and sex. It can be effective
household size or absolute household size. Due to the absence of findings a satisfactory and
country specific weight, we lead to use absolute household size than effective household size.
Table 4.1. Family size of the household.
No Total family size No of HH Percentage

1 0-3 43 27.56%
2 3-5 76 49%
3 Above 5 37 23.44%
Total 156 100%
Source; Author computation from 2016/17 survey
The above table shows that, 43(27.56%) of respondents answered that family size ranges
between 0-3 person per households, 76(49%) family size ranges between 3-5 person per
households, and 37(23.44%) family size have 5and above person per household.
29
Sex of the household head (sex)
Table 4.2. Demographic composition of sex
Sex of the household head No of HH Percentage

Male 125 80.12%
Female 31 19.88%
Total 156 100%

Source: Author computation from 2016/17 survey
As the above table shows that, 125(80.12) households are male, and 31(19.88) are female. From
this table we can conclude that, most of the households head are male. According to, Taddesse
kuma (2010), male household head is a primary decision maker and they have more access and
control over vital consumption expenditures than female household head because of many socio-
cultural values and norms.
Age of Household Head (Age)
It is one part of determinants of household consumption behavior in the world. Obliviously, age
of population can be classified into three major groups, that is, children, adult and old age. Even
if, the study considers age of household, this age group has their own contribution on household
consumption level.
Table 4.3. Composition of HH Head’s Age and Education Level
No Age group No of HH Percentage

1 19-65 (adult) 145 92.95%
>65 (old) 11 7.05%
Total 156 100%
Education level of household head
2 Cannot read and write 26 16.66%
Religious educated 12 7.68%
Primary(1-8) 31 19.90%
9-12 (secon&prepa) 21 13.46%
above 12 >> 66 42.30%
30
As a result, most household grouped under both adult and old age groups. According to the
above table 145(92.95%) of respondents are adult age and 11(7.05%) are old age. This indicated
that adults are more engage in production system with higher consumption. Therefore, these age
groups have either negative or positive effect on household consumption level.
4.1.2. Socio-economic profile of respondents

Education Level of Household Head (Educ)
Education level determines household consumption level. Because when each household start
education, they need different things or materials to achieve their objectives. According to (Yin
and et al), when they already educated, they know different items or commodities that are
available for consumption.
From the above table, any household under this study are both educated and uneducated that is,
they cannot read and write 26(16.66%). From respondents 12(7.68%) are take at least religious
education, 31(19.90%) are educated primary education (1-8 grade), 21(13.46%) are educated
secondary& preparatory (9-12grade) and the remaining 66(42.30%) are educated higher
education. Most household heads are grouped under higher education level. As a result, we can
conclude that household education (weather they are already educated or learning now) has great
impact on their consumption.
31
Household Saving Status (Sa)
Saving is deposited income after consumption. According to Harrod-Domar, it is considered

(proportional) as investment. It is more sensitive for interest rate (its saving rate is depends on
interest rate of the financial institutions).
Table 4.4. Response on household saving status
Items No of HH Percentages
Households those who save

money. 131 83.97%
Households those who are

not save money. 25 16.03%
Total 156 100%
According to the collected data we have collected for this study from the total household
131(83.97%) of households has their own saving account in different financial institutions,
which is found in Shashemene town. According to, Keynes (1946) when consumption increases,
saving decrease, and vice versa. From this, we can conclude that saving by itself has its own
negative contribution for household consumption.
Household Disposal Income (Yd)
It is the income after tax net income of household from different source of income. It is the most
important determinants of consumption compared to others. Most household’s income especially
those households, live in developing countries are shared consumption purpose. Any change in
disposable income may have direct effects on total expenditure. The direction of the effect of this
change depends on the income elasticity i.e. the ratio of proportionate change in demand to
proportionate change in income, explain that what will be the effect of demand when income of
consumer changes provided other things remains constant. It explain responsiveness in demand
32
in relation to change in the income of consumer), of the given commodity that is the
consumption pattern of welfare of the household. There is various measurements for welfare of
the society. Among this measurement according to the permanent income hypothesis
consumption expenditure is a better measurement of human living standard
Household income is one of the main determinants of household consumption level. According
to Mankiew, income and consumption have positive relation, means when income increase at
same time consumption also increase.
income level
Above 5000
4000-5000
3000-4000
2000-3000
Below 2000
0 10 20 30 40 50 60
Source; Author computation from 2016/17 survey
Fig 4.1 Income of respondents
As shown on the above chart 3.1 from respondents 7(.48%) are earn below 2000 birr monthly,
24(15.39%) respondents income level is found in from 2000-3000 birr per month, other
52(33.33%) of respondents get 3000-4000 birr income per month, 47(30.12%) of respondents
earn income 4000-5000 birr monthly and the remaining 26(16.68%) of respondents earn above
5000 birr per month. Most household grouped under from 3000-4000 and 4000-500 birr income
level. As a result, we can conclude that when the household have more income their
consumption expenditure also increase and vice versa. This implies that, household income has a
great positive impact on the household consumption expenditure.
33
4.1.2. Consumption expenditures
In this section of the study, more attention is given to show the share of household’s
consumption expenditure on different commodities or items from the expenditure.
2.50%
6.62% 9.82%
12.24%
52.64%
5.74% 10.44%
total food consumption expendituer on housing

expendituer on social , cultural life miscellaneous expenditure
expenditure for school
Fig 4.2 Household consumption expenditure
The result of this study shows that the consumption patterns of each household in the town
distributed on different commodity items in the following table.
Table 4.5. Percentage share of expenditure with sample size of 156.
No Expenditure items Percentage share

1 Expenditure on food 52.64%
2 Expenditure on housing 10.44%
3 Expenditure on social, cultural life 12.24%
4 Miscellaneous Expenditure 6.62%
5 Expenditure on school 9.82%
6 Expenditure on medical services 5.74%
7 Other expenditures 2.5%
34
Food expenditure
It is one the most basic needs for everyone to survive in life on the earth. It constitutes around
52.64% of the total consumption expenditure of the household. It does not mean that food is the
only consumption commodity rater it is compared to with others. Mostly it is known that the
share of consumption in poor countries are higher than that of rich countries , but this gap
declines (consumption share of poor countries decline) as its national income increases.
Expenditure on Housing
It includes house building materials, maintenance and rent expenditure, which constitutes
10.44% of in the total household expenditure. This shows that most households (residents) of
Shashemene town spend high rent for housing.
This is due to the imbalance between the income they received and the cost of materials for
building, because of existence of price shocks (inflation) and lack accessibility of land.
Cultural and Social Life Expenditure
Based on the result above, this expenditure item (expenditure on different ceremonies, donation
religious institution, contribution to idir ) comprises 12.24% in the total household expenditure.
Culture and social heritages are one of major difficult for economic development in least
developing countries. Because this leads the household to spent more of their income for such
type’s of extravagant like (wedding, teskar, and mahberetc) activities.
Miscellaneous Expenditure
This category of expenditure item in the household expenditure includes water bill, electricity
bill, and telephone bill, and mobile card, which constitutes 6.62% of the total household
expenditure.
School Fee
School fee,(school fee, other educational expenditure example, fees for maintenance and for
school fence). It accounts 9.82% of the total household expenditure.
35
Now a day people know the importance of education for sustainable economic development of
the country and improve social economic welfare of the society as whole. They give move
attention for education for children in privet school in addition to government schooling system.
This leads the household to spent more income on school fee.
Expenditure on the medical services
It includes both modern and traditional medical system, which accounts 5.74% of the total
household consumption expenditures. This result shows that either they it is in household a
position of good health condition or the household might use cheap medical treatment system.
According to the data collected shows, households have less spending on the medical services
and they may not afford medical services at all.
Expenditure on Other Goods and Services
This categories of expenditure item includes kitchen equipment, durable goods like (TV and
radio), fuel, utility personal care etc that constitutes 2.5% of the total household consumption
expenditure item. Durable goods are luxury, expensive and server the household for long period
of time.
4.1.4. Dependency ratio and self sufficiency
The rate that shows economically in active population (<15 and >65) years of age to those
economically active labor force in the household. According to the data we have collected for
this study from the total household 145(92.95%) of respondents are adults, those which are
engaged in economic activity. Therefore, the implication is that when the more dependent
members in the households consume higher than that of without dependent member. So, we can
conclude that, this variable has a positive effect on household consumption expenditures.
36
Table 4.6. Response about Sufficient Income to Cover Consumption
Item No of respondents Percentage (%)

Do you think your families
have sufficient income to
cover their own
consumption?
Households who have
sufficient income 99 63.46%
Households who have
no sufficient 57 36.54%
Total 156 100%
Sources: Author computation from 2016/17
The above table (4.6) indicates that, 57(36.354%) of sample respondents respond that their
family have not sufficient to cover their own consumption and the remaining of 99(63.46%) of
sample respondents respond that their family have sufficient income to cover their own
consumption, so we can infer that most of the respondents have sufficient income to cover their
consumption expenditure.
37
4.1.5. Households occupation.
Households head is considered to be engage in one off the following occupation: governmental,
vocational, privatization, and may be unemployed (no sources of livelihood). Household head in
works government office, privatization, and vocational worker are their mean consumption
expenditure is relatively high.
Table 4.7. Response about on household’s occupation
Items No of HH Percentage
Governmental 49 31.42%
Privatization 67 42.94%
Vocational worker 23 14.74%
Unemployed 17 10.90%
Total 156 100%
As shown on the above table (4.7), 49(31.42%) of respondents respond that they are
governmental worker, 67(42.94%) respondents are privatization worker, 23(14.74%) of
respondents are vocational worker, and the remaining 17(10.9%) of respondents are unemployed.
From this, we can infer that most of the households are private and governmental worker, though
this working condition (occupation) by itself their own great effect on household consumption.
Because when the households are governmental, privatization, and vocational worker they have
higher income throughout the year so their mean consumption expenditure is relatively higher.
38
4.2. Econometrical analysis
4.2.1. Diagnostic Tests

4.2.1.1 Overall level of significant test
The overall significance of the variable is tested by Prob> F. If Prob> F less than0.05 (5%) then
the explanatory variables included in the model are jointly statistically significant and the
explained variable. As a result show Prob> F= 0.0000 then, it is statistically significant.
The goodness of fit of the model is measured by coefficient of determination, which shows the
percentage or power of explained variable to express by the explanatory variables. This is
expressed by R –Square = 0.7921, which states that 79.21 percent of the variable of the
explained (dependant) variable is due to the variation of explanatory variables included in the
model and remaining variation (20.79%) is explained by variables which are not included in our
econometrical model. (See full result in Appendixes).
Normality Test
The model assumes that the random variable u has a normally distributed. Error term is normally
distributed around zero mean and constant variance. This means that small values of u’s have a
higher probability to observed than large values. This assumption is necessary for constructing
confidence intervals. If the assumption of normality is violated, the estimates of parameters are
still unbiased but the statistical reliability by the classical tests of significance of the parameters
cannot be assessed because these tests are based on the assumption of normal distribution of the
u. The normality test adopted Shapiro-wilk test for normal distribution. This test computes the
skewness and kurtosis measures of the OLS residuals and it follows the chi square distribution
(Gujarati, 2004). The null hypothesis is that has normal distribution against the alternative
hypothesis that the u is not normally distributed.
Normality Test Result

The model assumes that the random variable u has a normally distributed. Symbolically: u~N (0,
𝛿U), which reads: u is normally distributed around zero mean and constant variance 𝛿 2 u.
See full result in (Appendixes), the model is tested by predicting and histogram kdensity test, so
accept null hypothesis and the μ is normally distributed.
39
Multicollinearity test
This is a method that shows the interpretation between the explanatory variables.
The presence of multicollinearity affects the OLS estimator and make inefficient and
inconvenient. Therefore, it must be tested using variance inflation factor (VIF) method. IT shows
how the variance of estimator is influenced by the existence of multicollinearity. By using rule of
thumb:
1/M.vif<10, 1/1.87= 0.534, which is less than 10. So, in this model there is no multicollinearity
between the variables in the model
Hetroskedasticity test
This test concerned with variation of variance. Then, the Breusch Pagan (Cook- Weisberg test
for Hetroskedasticity are described.
Decision rule: if prob> chi2 is greater than 5%, accept H0 rather not reject the alternative
hypothesis (accept alternative hypothesis). Therefore, there is no variation of variance in the
model. In this model there is no variation of variance (hetroskedasticity problem). (See full result
in appendixes).
40
4.2.2. Determinants of household consumption behavior
Different demographic and socio-economic variables has been included as explanatory variables
in the above equation and estimated using OLS estimator as reported in table 4.8 below.
Table 4.8. Regression Result

________________________________________________________________________
Variables Coefficient Standard error_____
Disposable income of hh (Birr) .866674*** .050333
Family size .1581821*** .0608257
Education level (dummy) -.0066284 .0559657
Age of the hh head (year) -.1956019** .0947606
Saving status (dummy) -.2016073*** .0567452
Occupation (dummy) -.0096169 .0397894
Dependency ratio -.0286346 .0338682
Sex of the hh head (dummy) -.0062809 .0302436
Cons 1.477549***
F (8, 120) 57.15
Prob>F 0.0000
R-square 0.7921____________________________________
*** and **, significant at 1 and 5%, respectively. Source: own survey
The result shows (in table 4.8) that all the estimated coefficients expected variables disposable
income of the household (yd), age of the household head (age), family size (fam siz) and saving
status (sa) are highly statistically significant for their “p” value are extremely small.
41
The estimated coefficients are interpreted as follows:
The coefficient of household disposal income is significant at 5 % level of significant, including

that, keeping other things constant if disposable income of the household increased by 1 birr, the
mean consumption expenditure of the household increased by 86.64% than the previously. These
is due to, if the household’sincome increases their purchasing power become increase, at the
same time they can increase their consumption expenditure. This result is consistent with the
finding of Taddesse.K (2010) in urban Ethiopia with the analysis of household consumption
level.
The coefficient of family size to household consumption is positive that is 0.158 percent. And it
is significant at 5% significant level, showing that if family size of household increase by 1 unit,
mean consumption expenditure of each household increase by 15.8%.These implies that, if on
the household’s family member one child is added to the existing number of family food
consumption of the family increase, because of this consumption expenditure of the household
increase. The result on this variable is also in line with; the finding of the study was conducted
by ZelalemTesfaye (2005), in Addis Abeba is similar with study and they were found out the
positive relationship between large family size and consumption expenditure.
The estimated coefficient of saving status of household is statistically significant at 5%

probability, and the coefficient of saving status on house hold consumption level is negative; this
indicates that, household consumption expenditure in household who have saving habit is less
than that the households who haven’t saving habit by 20.16 percent. This implies that, from the
Keynesian model the higher the marginal propensity to save, will lead to a lower in marginal
propensity to consume. (I.e. Marginal propensity to consume = 1-Marginal propensity to save).
Therefore, the higher the saving that the household from his income lower proportion of income
left for his/her family consumption.
The coefficientof age of the household head is statistically significant at 5% significant level; the
coefficient of age of household on household consumption level is negative. This shows that, as
mentioned in descriptive part of the analysis most household engage in adult age group, which
are more productive, with high need of different instruments for production. As a result as they
transfer from adult age group to old age group their productivity as well as their consumption
42
becomes decreased. This coefficient shows this condition as a whole. These result also similar
finding with Bemnet (1996), the household head age are negatively related with the probability
of decrease their consumption expenditure.
All the repressors have signs that accord with prior expectation family size, and household
disposable income, both have positive contribution for household consumption expenditure. But
age of household head and saving status has a negative effect on household consumption
expenditure.
Generally, household disposable income (yd), family size, age of the household head, and saving
status of household has intuitively significant effect on household consumption level.
The constant term (B0) indicates that, autonomous consumption of house hold even they have not
their own income per month or whatever. These types of consumption come from different
sources like loan from different financial sector, which accounts 1.477% of the total
consumption expenditure.
43
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION

5.1 Conclusion
The study attempted that to show household consumption levels in shashemene town by
describing households, consumption expenditure item and by showing the effect of different
determinants of consumption like household disposable income, age of household head,
education level of household head, family size of the household, saving status of household,
dependency ratio, occupation of the household head, and sex of the household head, in this study
156 household are taken as a sample at random in two selected sub cities. To do this OLS
estimation is employed.
The descriptive part of the study result shows that households spent their income on seven major
commodity items; Those are, expenditure on food, housing, social, cultural life, school, medical
services, and other expenditures. From the total budget of household, most part of the budget is
used for consumption purpose. From this, we can conclude that the saving habit of each
household in the town is low even if they participate in saving activity.
Adjusting and giving emphasis for such type of condition helps to achieve the goal of
government that is put under the statement of the problem like SDPRP and FYGTP. That is, it is
easy for the concerned body (government or public) to give solution for such types of goals
(achieving SDPRP, FYGTP and improve human living standard). As indicated in discussion
part, households spent their income for extravagant activities such as culture and social life.
The OLS result show that household consumption positively affected by disposable income,
family size, and negatively affected by age of the household head, and saving status of the
household. When we see the overall significant of the model (R2) it is seems good fit. But it
indicates that I left other explanatory variables which are essential to determine consumption
behavior.
44
5.2 Policy Recommendation
After taking above result in to consideration, the author recommended the following ideas:
It is evident from the finding of the study that a sizable portion of households that are now their
consumption expenditure is lower are certainly higher to falling into their investment near the
future decline. This has policy implication and therefore such results should be taken in to
account, particularly when policy maker design social policies. Appropriate measure should be
enhanced to prevent as money households to save more instead of higher spending for near
future investment.
Household with large family size and high number of dependent were found to have significant
positive association with probability of being their consumption expenditure is higher near
future. The result is fair enough to indicate the need to ensure appropriate implementation of
family planning programs. In addition creating awareness on the negative impact of large family
size through all means of Medias might produce significant reduction on households higher
spending.
Since households give more attention for consumption than saving, it needs a vast investigation
on household consumption to enhance saving and design proper policy for integrated economic
development. During the consumption expenditure household are better to use their own note
book (record habit of expenditure) because it is good for plan saving and expenditure. In addition
to this awareness should have given to the household to save part of their income and reducing
the extravagant and cultural consumption habit to enhance the sustainable development of the
country. The government or food agency should set out various proclamations in relation with
household consumption behavior. Study in this area is a process, not the end. Then it gave the
way to other interested bodies to do the study on this area by including another more explanatory
variable which is very essential for consumption determinant, not included in this model.
45
References
Adetotun, P. (1978). Nigeria’s Public Consumption Expenditure. The Journal of Economics and
Social Structure.
A.koutsoyiannis (1997). Modern Micro Economics University of ottawaoontario.
Branson; W.H (1989), “Macro Economic Theory and Policy”. 3rd edition, Newyork: Harper and
Row.
Central Statistical Agency (CSA) of Ethiopia 2007.Statistical Report; Household Income,

Consumption, and Expenditure (HICE) Survey 2004/05, Volume II, Number 394. A.A.
Deaton (2001): Understanding Consumption, Clarendo Press, London pp.40-50
Dourn bush, (1975). Macroeconomics, consumption and saving Chicago University, USA
Gujratati. D (2004). Basic econometrics, United States of America, Mc Graw-Hill press.
Hendrik s. Houthakekr, Consumer Demand in the United States, volume 25,(1957)
Henery. J.Aaron .(2001) world book, vol.4USA, Chicago

M. Gregory Mankiew (2000), Macroeconomics, Harvard University press.
Ministry of Finance and Economic Development (MoFED) 2008.Dynamics of Growth and
Poverty in Ethiopia. Addis Ababa: MoFED.
Robert Mc Henery ,(1968), economic theory world book, vol.17
R.Nelson and David ,(2010) , an evolutionary theory of HH consumption behavior, Colombia

university new York , USA and university of Manchester, UK
Sitotaw and Nigus, (2006), introduction to economics. AA, Kuraz international publisher.
Soni, R.N (1995). Leading issues in agricultural economics theoretical and applied. New Delhi
Tadesse kuma (2010). Analysis of change in food consumption patterns in urban Ethiopia.
Ethiopian development research institute AA, Ethiopia
Tafere .K ; P. Zelekework; A.S.Taffese, T.Nigussie, and T. Seneshaw; 2009. Food Demand
Elasticities in Ethiopia: Estimate using 2004/05 Households, Consumption Expenditure (HICE)
Survey Data.
Yin W. Devaney S. and Stalura, 2005. Determinant of Household Expenditure on food

Consumption.
Zelalem Tesfaye, (2005), analisis of household consumption behavior. Ethiopia, AA university.
46
APPENDIXES
Appendix 1:OLS regression result
. reg lnct lnyd lnfamsiz educ lnage sa occup lndepr sex
Source SS df MS Number of obs = 129

F( 8, 120) = 57.15
Model 10.1786652 8 1.27233315 Prob > F = 0.0000
Residual 2.67169834 120 .022264153 R-squared = 0.7921
Adj R-squared = 0.7782
Total 12.8503635 128 .100393465 Root MSE = .14921
lnct Coef. Std. Err. t P>|t| [95% Conf. Interval]
lnyd .866674 .050333 17.22 0.000 .7670182 .9663298

lnfamsiz .1581821 .0608257 2.60 0.010 .0377513 .2786128
educ -.0066284 .0559657 -0.12 0.906 -.1174366 .1041798
lnage -.1956019 .0947606 -2.06 0.041 -.3832213 -.0079826
sa -.2016073 .0567452 -3.55 0.001 -.3139589 -.0892557
occup .0096169 .0397894 0.24 0.809 -.0691634 .0883971
lndepr -.0286348 .0338682 -0.85 0.400 -.0956916 .0384219
sex .0062809 .0302436 0.21 0.836 -.0535993 .0661611
_cons 1.477549 .4958333 2.98 0.003 .4958336 2.459264
Appendix 2: hetroskedasticity test
. hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of lnct
chi2(1) = 2.92
Prob > chi2 = 0.0875
47
Appendix 3: multicollinearity test
. vif
Variable VIF 1/VIF
sa 3.25 0.307567
educ 2.75 0.363874
lnfamsiz 1.95 0.511799
lnage 1.83 0.545994
lnyd 1.65 0.606616
occup 1.39 0.718170
lndepr 1.06 0.942994
sex 1.05 0.954407
Mean VIF 1.87
Appendix 4: normality test by using histogram
48
3
2
Density
1
0
-.4 -.2 0 .2 .4
Residuals
49
Appendix-5: Research questionnaire
ARBAMINCH UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS
Research questionnaire
This questionnaire is prepared by students at Arbaminch University in department of Economics.
The purpose of this questionnaire is to study the expenditure behavior (pattern) of households
and to know the major determinants of consumption under a title “household consumption
behavior analysis” in Oromia region Shashemene town. The questionnaire is going to use for
academic and economic research purpose only.
Instruction
 You are not supposed to write your name

 Your response should be confidential
 Please tick (√) in the box according to your choice explain or circulate letter of your
choice
 Thank you for your advancement
A. General Information
1. Age of the household head___________________________
2. Sex of the household head male female
3. Education levels the household head.
A. . Cannot read and write

B. . religious education
C. . Primary school (1-8)
D. . secondary and preparatory (9-12)
50
E. . above grade 12
4. Total no of family size _________ male ___________ female________________
4.1 How many are dependent?
A. 0-15_______
B. 15-65______
C. above 65____
Male_____________ female________________
B. Information of occupation
A. Governmental C. vocational worker
B. Privatization D. Unemployed
Specifically ____________________________________
5. The total net income that the family received from different source per a month in birr
____________________________________________________
6. Based on question number 5, answer the following questions.
6.1 Total expenditure on food and drink per month (including cereal, vegetables, Milk, onion,
oil etc.) in birr _______________________
6.2 Total expenditure on cloth including footwear per month in

birr_________________________
6.3 Total expenditure on housing (building, rent etc.) in birr_______________________
6.4Total expenditure on social and culture life (different ceremonies, suchas, Idir etc.) in
birr________________________________________________
6.5 Total expenditure on miscellaneous (such as water bill, electricity bill, Telephone bill
including mobile card) per month in birr________________________
51
6.6Total expenditure on school fee (fee and expenditure for building or repairmen of old
school) in birr____________________________________
6.7 Total expenditure on medical services (treatment) per month in birr

___________________
6.8 Total expenditure on others (including utility, kitchen equipment, transportation, etc.)In
birr_______________________________
7. Do you save?
Yes No
8. Who decide on expenditures? __________________________________________________
9. Do you have a plan to engage in investment activity in near future?
Yes No
11. Are, there any families’ dependant on you as a source of income?
Yes No
12. Mention the income source of your parents? _____________________________________
13. Do you think your families have sufficient income to cover their own consumption?
Yes No
14. What do you expect about you’re your future income?
A. To be significantly higher C. Similar

B. A little bit higher D. uncertain
C. To be lower
15. How much was your income at this time a year before? ____________________________
Thank you!!!
52
53

ARBA MINCH University

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ARBA MINCH University

Uploaded by

Copyright:

Available Formats

ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

THE DETERMINANT OF HOUSEHOLD CONSUMPTION

A RESEARCH PAPER SUBMITTED IN PARTIAL FULFILLMENT OF THE

ID. No: RBE/223/07

ADVISOR: TEKLEBIRHAN A. (MSc)

Finally, thanks to all who wish my success!

List of table ............................................................................................................................ iv

List of figurennnnnnnnnn ................................................................................................................. v

CHAPTER ONE ............................................................................................................................... 8

1.1 Back ground of study ........................................................................................................................ 8

1.2 Statement of the Problem .................................................................................................................. 10

1.3 Objective of the Study ...................................................................................................................... 12

1.3.1 General objective ....................................................................................................................... 12

1.5. Scope of Study ................................................................................................................................. 12

1.6 Limitation of the study ...................................................................................................................... 13

1.7 Organization of the study .................................................................................................................. 13

CHAPTER TWO ............................................................................................................................ 14

2. Review of Literature ................................................................................................................... 14

2.1 Review of Theoretical Literature ...................................................................................................... 14

2.1.1 An Evolutionary Theory of Household Consumption Behavior................................................ 14

2.2.1 Static Theory of Consumption Behavior ................................................................................. 18

3.1. Description of the study area ........................................................................................................... 22

4. Discussion and Data Analysis ...................................................................................................... 29

4.1. Descriptive Analysis ........................................................................................................................ 29

5. Conclusion and Recommendation ................................................................................................... 44

Appendix 1............................................................................................. Error! Bookmark not defined.

Appendix 5............................................................................................. Error! Bookmark not defined.

Table 4.1 Family size of the household---------------------------------------------------------------

Table 4.2 Composition of HH Head’s Age and Education Level ---------------------------------

Table 4.3 Response on household saving status------------------------------------------------------

Table 4.4 Demographic composition of sex----------------------------------------------------------

Table 4.5 Percentage share of expenditure with sample size of 156-------------------------------

Table 4.6 Response about Investment-----------------------------------------------------------------

Table 4.7 Response about Sufficient Income to Cover Consumption------------------------------

Table 4.8 Response about on household’s occupation------------------------------------------------

Table4.9 Regression estimate of coefficient associated with determinant household consumption-

Fig 4.2 Household consumption expenditure---------------------------------------------------------

MLRM________________________________ Multiple linear regression model

CSA__________________________________ Central statistical agency

OLS___________________________________ Ordinary least square

FYGTP________________________________ Five year growth and transformation plan

MoFED________________________________ Ministry of finance and economic development

In modern term household consumption previously defined 70 to 80 percent of total national

1.2 Statement of the Problem

The level and distribution of poverty in Ethiopia is extensive. According to 2010/2011

 Which Socio-economic factors more determining household consumption in

1.3.2. Specific objective

 To examine the demographic factor of household consumption level in Shashemene

1.4. Significance of study

1.5. Scope of Study

1.7. Organization of the study

2.1. Review of Theoretical Literature

2.1.1. An Evolutionary Theory of Household Consumption Behavior

2.1.2. The Permanent Income Hypothesis

2.1.3. The Life Cycle Hypothesis

According to him, age structure of the population is an important determinate of consumption

2.2.1. Static Theory of Consumption Behavior

In addition to this ZelalemTesfaye, (2005), analyzed household consumption behavior in Addis

2.2.2. Life Cycle/ Permanent Income Theories

Additionally, Tadesskuma, 2010, analyzed changes in consumption patterns in urban Ethiopia,

METHODOLOGY OF THE STUDY