This section presents the speculative and realistic methodology, which is employed to provide a clue to objectives stated in this study. The chapter derives 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.
4.2 Conceptual framework
The theoretical relationship between government expenditure and economic growth is well acknowledged in many literatures. This study follow the structure of Cobb douglous production function, which is prolonged to include government expenditure reaching growth function which before exploited by Kweka (1999) on his report in Tanzania economy and then implemented by Ketema (2006) in the same study in Ethiopia. In the model, output is assumed to depend on capital (K), labour (L) and government expenditure (G)
Y = f (K, L, G) …(1)
But in this era 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 (K, L, G, X) …(2)
The increase in capital can be termed as investment, which is explained as an objective of government to increase development expenditures of which part of it form investment capital. Government development expenditure can be disintegrated into three sections that are education expenditure (Ed), health expenditure (H) and also defense expenditure (D). Education and health expenditure also can be termed as expenditure on human capital (Labour) as it increases productivity/output through discovery of new technology, maintenance of good health of citizen increase effectiveness and efficiency in delivering services on average. Thus, the model above can be inflated with these variables.
Y = f (1, Ed, H, D, E) …(3)
Where by Output is the function of investment, education expenditure, health expenditure defense expenditure and value of export of a given country.
4.3 Model Specification and Variables Definition
4.3.1 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 research combines some of 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;
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 bias and multicollinearity problem.