AN ECONOMETRIC INVESTIGATION OF THE CONSUMPTION THEORY IN A DEVELOPING COUNTRY

Abstract

The study sets out to investigate the relevance of the consumption theory to the conditions of a developing country such as Nigeria. In pursuance of this objective, a household budget survey on consumption expenditure, income and family size was conducted in eight towns randomly selected in the old Western State of Nigeria in 1975. In each of the towns, thirty households consisting if 15 self-employed and 15 wage-earners were selected randomly and interviewed. In order to develop a relevant model for the Nigerian situation, the various version of consumption theory were interviewed. These consist of Keynes general theory of consumption, Friedmans Permanent Income Hypothesis, Duesenberrys Relative Income Hypothesis, and Kuznet Shifting Consumption Function. This critical review led to the specification of a postulated consumption function for the Nigerian situation, which represents some variants of the Relative Income and Permanent Income Hypothesis. This postulated consumption function was estimated using the least square method. The following were the major findings:

• marginal propensity to consume is greater than zero, but less than one,
• that marginal propensity to save by the self-employed is greater than that of the wage-earners and
• that household consumption is greater than zero when the households income is zero.

This latter finding in our opinion is a result of the extended family system