3.0 METHODOLOGY

3.1 Introduction

This chapter shows the speculative and realistic approach that is employed to provide a clue to objectives stated in this research. This chapter will show the standard that will be used to explain government expenditure and its effect on the economic growth of Tanzania. It is extended to capture theoretical context and also provide insight on where the data was acquired and methods employed in analyzing data.

3.2 Conceptual framework

The theoretical relationship between economic growth and government expenditure is well acknowledged in many literatures. This study follow the structure of Cobb douglous production function that was exploited before by Kweka (1999) and Ketema (2006) on their reports on Tanzania and Ethiopia economy respectively in the same study which was prolonged to include government expenditure reaching growth function. In the model, output is assumed to depend on capital (K), government expenditure (G) and labour (L).

Y = f (K, G, L) …(1)

But in this period of globalization, export (X) is very vital in defining variations of output but not captured by the general model. The model can be improved to include export value as follows;

Y = f (X, K, G, L) …(2)

The increase in capital can be characterized as investment, which is later explained as an objective of government to increase development expenditures of which part of it establish investment capital. Government development expenditure can be disintegrated into three sections that are health expenditure (H), education expenditure (E) and also defense expenditure (D). Health expenditure and education expenditure can be termed as expenditure on human capital as it increases productivity and or output through finding of new technology, maintenance of good health for the people increases efficiency and productivity in delivering services on required amounts. Thus, the model above can be inflated with these variables.

Y = f (1, H, E, D, X) …(3)

Where as, the output is the function of value of export of a certain country, investment and (health, education and defense) expenditure.

3.3 Model Specification and Variables Definition

3.3.1 Model Specification

Different researchers have discussed about the effect of government spending on economic growth using diverse variables relying on the availability of the data, the literature they reviewed and the country resources. This study combines various variables used by Ketema (2006) and that of Kweka and Morrissey (1999) in Ethiopia and Tanzania, respectively the selection of this variables best ensemble the literature reviewed and also due to data accessibility. The basic equation can be presented as follows;

LGDP = ?0 + ?1Lp + ?2Lh + ?3Ld + ?4Lx + ?5Le + ?t …(4)

Where; L denote logarithms, ?t is the error term which follow all the rules of classical linear regression, LGDP is the logarithms of GDP, Lh is the logarithms of health expenditure, Lp is the logarithms of government investment expenditure, Le is the logarithms of education expenditure, Ld is the logarithms of defense expenditure and Lx denotes logarithms of export. The attachment of logarithms on both sides of the equation helps in standardizing variables under the study. Independent variables could be expressed as a ration of Gross Domestic Product but this could lead to simultaneity partiality and multiple correlation problems.