The Relationship between Gross Disposable Income and Consumption and Estimating the Consumption Function for Palestine

The purpose of this paper is to analyze the relationship between Gross Disposable Income (GDI) and consumption, and estimate the consumption function for Palestine. Three econometric models were constructed to estimate the consumption function. A time series and a regression analysis were performed. The data was collected from the Palestinian Central Bureau of Statistics. The time series analysis found that GDI and growth of consumption are co-integrated, that is they have long term relationships and GDI granger causes growth of consumption. The three regression models estimated both the short run and long run consumption functions. The results will help the policy makers to direct fiscal policy in a manner that will improve the standard of living for the Palestinian people.