A Way to Escape Poverty

A Regression Analysis on How Adolescent Fertility Rate, GDP per Capita based on
PPP and Unemployment Rate Affects Poverty

A partial fulfillment
of the requirements
in ECONMET
1st Term, AY 2014-2015

Submitted to:
Dr. Cesar Rufino
School of Economics
De La Salle University

Submitted by:
Shaira Marie S. Ibas
11239190

August 27, 2014

1

Table of Contents
INTRODUCTION ............................................................................................................................................ 3
Background of the Study .......................................................................................................................... 3
Statement of the Problem ....................................................................................................................... 5
Objectives of the Study ............................................................................................................................ 5
Significance of the Study .......................................................................................................................... 6
Scope and Limitation ................................................................................................................................ 7
REVIEW OF RELATED LITERATURE ............................................................................................................... 8
Poverty Headcount Ratio at National Poverty Line ................................................................................ 8
Gross Domestic Product per Capita based on ......................................................................................... 9
Purchasing Power Parity (current international $) ................................................................................. 9
Unemployment Rate .............................................................................................................................. 10
Inflation Rate .......................................................................................................................................... 11
Adolescent Fertility Rate ........................................................................................................................ 12
THEORETICAL FRAMEWORK ...................................................................................................................... 13
Culture of Poverty Theory ...................................................................................................................... 13
Budget Constraint and Utility Maximization ......................................................................................... 13
Theory of Consumption.......................................................................................................................... 14
OPERATIONAL FRAMEWORK ..................................................................................................................... 15
Description of the Variables Used ......................................................................................................... 15
Hypothesized Econometric Model ......................................................................................................... 18
METHODOLOGY.......................................................................................................................................... 19
Data and Estimation ............................................................................................................................... 19
Summary of Observations (Descriptive Statistics) ................................................................................ 20
EMPIRICAL RESULTS AND INTERPRETATION ............................................................................................. 22
Initial Regression .................................................................................................................................... 22
Test for Multicollinearity ....................................................................................................................... 25
Test for Heteroscedasticity .................................................................................................................... 26
Test for Misspecification ........................................................................................................................ 28
Test for Joint Significance ...................................................................................................................... 29
FINAL REGRESSION MODEL........................................................................................................................ 31
CONCLUSION AND RECOMMENDATIONS ................................................................................................. 32
BIBLIOGRAPHY............................................................................................................................................ 33
APPENDIX ................................................................................................................................................... 36
2

INTRODUCTION
Background of the Study
"The poverty of our century is unlike that of any other. It is not, as poverty was before,
the result of natural scarcity, but of a set of priorities imposed upon the rest of the world by the
rich. Consequently, the modern poor are not pitied...but written off as trash. The twentiethcentury consumer economy has produced the first culture for which a beggar is a reminder of
nothing." These are the words said by John Berger (1991) in his book, Keeping a Rendezvous,
which contains essays about numerous photographs that convey different messages.
Poverty is the condition that almost half of the worlds population experience. In fact,
more than 3 billion people have to face this challenge. But why is this happening to them?
Should they blame themselves for being on that circumstance? Is it their fault because they
made mistakes in making decisions? Is this because they are lazy? Or, is it the government who
should be put to blame? Are their programs and projects benefiting the majority, especially the
poor? (Shah, 2013)
We may be aware that poverty exists, however, we do not know the real case. According
to Do Something Organization (n.d.), 80% of the people in the world have less than $10 a day to
live and 22% of them have less than $1.25% a day to live. In fact, 1.2 billion of them live in
extreme poverty and only have less than a dollar daily. Poverty is so evident that 870 million
people all over the world do not have enough food to eat. The worlds population has 2.2 billion
children and 1 billion of them experience poverty. There are 25,000 people who die every day
because of poverty and 22,000 of those are children. UNICEF (n.d.) stated that every 3.6

seconds, a person dies because of poverty and most of the time, it is a child under the age of 5.
It goes to show that poverty greatly affects the children negatively.
Poverty is one of the reasons why a lot of organizations and institutions have been doing
their best to help eradicate poverty. According to United Nations (n.d.), extreme poverty is still
one of the primary challenge of todays international community. Furthermore, governments,
civil society organizations and the private sector should work hand in hand to end the struggles
of a lot of people. This is why they made the Millennium Development Goals which consists of
eight problems and issues that are rampant in the international setting such as issues on gender
equality, environmental sustainability, primary education, child mortality, HIV/AIDS and other
diseases, maternal health, global partnerships and poverty. For them, achieving their goals are
ambitious but they are positive that by 2015 their goals are already met, especially the
alleviation of poverty. In fact, the number of people who experience poverty decreased by 650
million for the last three decades. However, this is not enough as there are still more than a
billion who live in extreme poverty.
For the United Nations (2013), economic growth will not be enough to alleviate poverty.
According to them, there is a need for it to be inclusive and stable, and focused on the
development of the poor and marginalized peoples needs to be able to increase employment
and decrease poverty incidence. Furthermore, if men and women are given equal opportunities,
the economy will grow more, thus, reducing the incidence of poverty.
In this paper, we will take a look at the basic effects of economic factors and
demographic factors to poverty incidence. Here, we will analyze how adolescent fertility rate,
unemployment, GDP per capita and inflation rate affect the poverty headcount ratio at a national
poverty line of a country.

Statement of the Problem

By 2010, the number of people who live extreme poverty, those who live with $1.25 or
less, decreased to less than half of the number of people who experience poverty in 1990. This
implies that compared to 1990, there are 700 million people who were able to escape poverty by
2010. Even so, that reduction is not huge enough because there are still 1.2 billion people who
are living in the condition of extreme poverty (United Nations, n.d.). At the present, there are a
lot of organizations aside from the United Nations that make actions to decrease poverty rates.
However, there is insufficient implementation of economic policies that can affect the poverty
rates. Hence, this paper aims to determine economic factors which can decrease the incidence
of poverty across nations. Thus, this paper will use indicators such as the Poverty Headcount
Ratio at National Poverty Line, Adolescent Fertility Rate, Unemployment Rate and Inflation
Rate.

Objectives of the Study

The primary objective of this empirical analysis is to evaluate the factors that affect
poverty, as determined by the Poverty Headcount Ratio at National Poverty Line. The
researcher aims to find out whether there is a relationship between the dependent variable,
Poverty Headcount Ratio at National Poverty Line, and the independent variables such as
Adolescent Fertility Rate, Unemployment Rate, GDP per capita based on PP. Aside from that,
this paper also aims to:
1.) To explain how the increase of Adolescent Fertility Rate, Unemployment Rate and Gross
Domestic Product per capita based on Purchasing Power Parity can help or worsen
poverty.

2.) To apply economic theories in establishing a valid model for the Poverty Headcount
Ratio at National Poverty Line by using econometric procedures
3.) To give the policy-makers a basis which is obtained from regression analysis results for
their future plans and actions

Significance of the Study

Poverty is really evident these days. It can be seen in every corner of the streets. It is not just a
problem within a single country, but it is one of the biggest problems that the world faces
together. Although poverty is rampant, it can be alleviated. They face the challenge of finding
food for every day to survive and this lead to other things like doing crimes or inhumane jobs.
Poor people are usually discriminated and are usually looked down. They are not given equal
respect and opportunities. But, we have to power to make things better and help them escape
poverty. Having said that, this study would prove that actions can be done to reduce the
incidence of poverty with the use of economic policies. Furthermore, this study will help the
government, law-makers and organizations in making the right decisions to be able to reduce
poverty incidence. If through this empirical analysis, the independent variables have been
proven to have a significant relationship with the dependent variable, it can be used to
understand poverty using economic factors and it can be used as a basis to be able to make
relevant actions such as laws, policies and programs to be able to alleviate poverty. Through
this, they can consider the policies that they plan to impose since they will know that these
economic factors can greatly affect the condition poverty as well as the growth of their
respective economies.

Scope and Limitation

This study focuses on Adolescent Fertility Rate (births per 1000 women aged 15-19),
Gross Domestic Product per capita based on Purchasing Power Parity and Inflation Rate as
determinants of Poverty Headcount Ratio at National Poverty Line (% of population). The data
that will be used for this study were all gathered from the World Bank. To get the best possible
results, the latest year with the most observations for the Poverty Headcount Ratio at National
Poverty Line was used, which is 2009. However, even if the year 2009 has the most
observations, some countries do not have the values or data for the independent variables.
Thus, those countries that have incomplete information for the independent variables were
omitted from the cross-section data set. Hence, the data set includes 54 countries and it will be
used to determine the relationship of Poverty Headcount Ratio at National Poverty Line and the
three independent variables with the use of multiple regression.
The software that will be used for all the regressions, computations, tests and estimation
of models are Stata 12 and Gretl. This empirical analysis will make use of cross-sectional data
to be able to determine the effects of economic and demographic factors such as Adolescent
Fertility Rate, Gross Domestic Product per capita based on Purchasing Power Parity and
Inflation Rate on reducing the incidence of poverty.

REVIEW OF RELATED LITERATURE

Poverty Headcount Ratio at National Poverty Line
The World Bank (n.d.) defines the poverty headcount ratio at national poverty line which
is also known as the national poverty rate as the percentage of the population who lives below
the national poverty line. It is also obtained from population-weighted subgroup estimates from
different households through surveys. National poverty line, on the other hand, which is also
known as the poverty threshold, is the cost of food and non-food necessities. Non-food
necessities includes housing, clothing, footwear, electricity, water, education, medication,
transportation, communication, etc.

(NSCB, 1997). The Poverty Headcount Ratio at National

Poverty Line was chosen as the indicator of poverty because it shows the percentage of the
population that are poor.
Furthermore, it is the indicator that is usually used by governments and international
organizations in presenting data regarding poverty. It is commonly used because it is easy to
understand and it is also insusceptible to the degree of poverty in such a way that the
headcount ratio does not change regardless of how low the income of a person is. It is also
insusceptible to distribution of income among the poor because if one person living below the
poverty line has less money than the other person who is also living below the poverty line, the
headcount ration will not change because a person still remains to be living below the poverty
line (Vecchi, 2007).

Gross Domestic Product per Capita based on

Purchasing Power Parity (current international $)
Purchasing Power Parity Gross Domestic Product is converted into current international
dollars with the use of the rates for purchasing power parity. The purchasing power of the
international dollar has the same purchasing power with respect to the purchasing dollar of U.S
Dollar in the United States. Gross domestic product, on the other hand, is the total gross added
value from all the producers residing in the country or economy, including the product taxes and
excluding subsidies that are not included in the products value. Devaluation, degradation and
depletion of fabricated assets and natural resources are also excluded from the computation of
the GDP (World Bank, n.d.). In addition, it is a measure of the wealth of an average person in a
country. It is also influenced by international competition. It is chosen as an indicator because it
allows comparison of the size of basket of goods that one can buy in a country.
According to Valentina Pasquali (2013), the Gross Domestic Product per Capita based
on Purchasing Power Parity (GDP per capita based on PPP or GDP, PPP) is commonly used
by most economists compared to Gross Domestic Product per Capita when it comes to
measuring welfare or poverty. This is because the differences in the standard of living of people
across nations are not differentiated with GDP per capita. Whereas, when GDP per capita
based on PPP is used inflation rates and cost of living are considered. GDP per capita should
be converted into PPP terms because when same goods and services are converted to same
currency by using market exchange rate, real differences in income distortion may occur.
In fact, GDP per capita based on PPP was used by the World Health Organization in
one of its articles. From its article, it stated that countries with higher GDP per capita based on
PPP are the ones that experience lower rates of absolute poverty. It also indicated that the
Central Eastern Europe and Commonwealth of Independent States experienced increase in

poverty and later on, also experienced decline in poverty. That happened because of the
changes in the GDP per capita based on PPP (WHO, n.d.).

Unemployment Rate
By definition, unemployment rate is the percentage of the labor force that do not have
jobs but are available and want to be employed. On the other hand, labor force is the term used
to describe people aged 15 and above who meet the qualifications and requirements of the
International Labor Organization when it comes to a population that is economically active.
Labor force includes those who are looking for job for the first time, the unemployed, employed;
however, homemakers and those who do not receive salary and those who work for the informal
sector are not included in the labor force (World Bank, n.d.). This indicator will show the
individual security since employment is the usual source of income of most people which allows
the people to buy their needs and wants.
Unemployment and poverty are one of the most common issues in developing countries.
In fact, developed countries also experience this at some points due to global recessions and
crisis. To give an example of unemployment and poverty, the case of India should be taken as
an example. In the case of India, unemployment and poverty hinder its economic growth.
Together with unemployment, underemployment weakens the economy of India from time to
time. Amidst good harvest, farmers are not working for the whole year. Another concern is the
regional disparity which causes the urban workforce of India to be subjected to subemployment. And due to a lot of people from rural areas who are moving to the urban areas,
unemployment and poverty problems of India just get bigger (Economy Watch, 2010).
The Census Bureau of Syracuse conducted a survey. The result was that for 2012, 14%
of the labor force are unemployed. That result was the highest for four years. From that study,
they also found out that the number of people and children who are living in poverty are also at
10

its highest for four years. Furthermore, more than one-third of Syracuse is experiencing poverty.
For children, 55% of them are living in poverty (Eisentadt, 2013).
In the case of Ireland, an article states that unemployment is the primary cause of
poverty. It explains that people who are unemployed are more likely to live in poverty and that
they are less likely to find jobs. The extent to which wages are covered by social welfare
payments significantly influence the standard of living that people who do not have jobs can
sustain. Thus, the degree to which they can escape or live in poverty is affected by employment.
It has been discovered that there is a huge relationship between long-term unemployment and
poverty. More than of the families that are considered poor are headed by those who are
unemployed. Since the heads of the family are usually those depended on by the rest of the
family, then there is a higher chance of poverty when no one else in the family has a job and
when there are children who depend on their family heads (Combat Poverty Agency, 1999).

Inflation Rate
Inflation rate is defined as the rate at which average prices of goods in the economy
increases or simply, the price level. Economists measure inflation rates in two ways. One of
which is the GDP deflator and the other is the Consumer Price Index or CPI. GDP deflator is the
average price of final goods that are produced in an economy. On the other hand, the
Consumer Price Index or the CPI is the average price of what people consume. This is an
important factor because it affects the consumption of the people. This is because in times of
inflation, prices and wages do not increase in proportion (Blanchard, 2013).
From 1959 to 1983, it has been seen that inflation and unemployment rates were related
positively to poverty. Even if increases in inflation rate is associated with increases in the
steady-state of poverty, this effect is weaker compared to the increases in poverty that is
caused by unemployment (Blank and Blinder, 1986).

11

From 1977 to 1989, it has been observed in the Latin America, specifically in Argentina,
that the inflation causes the real wages to decrease and it shows increase poverty. While in
Greater Buenos Aires, it has been seen that from 1980 to 1986, the people who live in poverty
increased from 6% to 11%, and in 1989, it increased again to 22%. The reason behind this is
the decline of the real wages which is caused by inflation (Morley and Alvarez, 1991).

Adolescent Fertility Rate

By definition, Adolescent Fertility Rate is the number of births for every 1000 girls that
are 15 to 19 years old. It also embodies the risk of bearing a child among girls that are aged 15
to 19 years old. In addition, it is an age-specific measure of fertility rate (United Nations, n.d.).
Teenage pregnancy may cause a girl to exit school and thus, her human capital
accumulation gets limited. Later on, her employment, productivity and income may be affected
(Madhavan and Thomas, 2005). In addition, if a teenage mother lives in a place where out-ofwedlock bearing of child is not much accepted in the community, it may lead to social rejection,
alienation and a bigger tendency to become a single parent, have constrained avenue to social
capital and have limited support from her family and the community. Those things may be the
cause of persistent poverty, possible loss of income, occurrence of gender gaps and
transmission of poverty from one generation to the next (Greene and Merrick, 2005). It has been
observed that among adolescents who are living in poverty, fertility rates are higher. In Latin
America and the Caribbean, the probability of being a teenage mother increased among the
poor in the national level and urban areas. With health risks, educational obstacles and
uncertain future for the mother and the child, having more poor teenage mothers will lead to
intergenerational duplication of poverty (Rodriguez and Hopenhayn, 2007).

12

THEORETICAL FRAMEWORK
Culture of Poverty Theory
American anthropologist, Oscar Lewis, developed the culture of poverty theory. Based
on his studies, the culture of poverty establishes a design for living which proceeds from one
generation to the next. Individuals feel discouraged, criticized, useless and inferior and they end
up living for the day. These people who practice the culture of poverty are those who came from
broken families, such as those who have families with teenage mothers or abandoned mother
and children. Furthermore, the culture of poverty tends to continue from one generation to
another because of its impacts on children. By the age of six or seven, the children must have
taken the values and attitudes of their culture. They are also not ready to take advantage of the
possible opportunities which may come to them in the future. For Lewis, the culture of poverty
theory is only applicable to people who live in developing countries. However, for Michael
Harrington, an American sociologist, this theory is also applicable to people who live in
developed countries (Stein, 2004). This theory is used to link adolescent fertility rate to poverty.

Budget Constraint and Utility Maximization

This economic concept explains how much goods and services people can get given the
income that they have. It implies that a given a certain amount of income, people cannot buy
more good and services once they use up all the income that they have. Thus, people have to
think of the best ways to allocate their income to maximize their utility. This concept shows that
because of changes in the purchasing power of people, they also have to change the way they
allocate their money to buy goods and services (Snyder & Nicholson This economic theory is
used to show the relationship of unemployment rate to poverty.

13

Theory of Consumption
Consumption is the total goods and services bought after the tax has been subtracted
from the total income. Thus, consumption depends on income and taxes. People tend to
consume more when they have higher income (Blanchard, 2010). Thus, having said that,
consumption reflects the standard of living of people by Gross Domestic Product per Capita.
Therefore, it provides a link between PPP based GDP per capita and poverty.

14

OPERATIONAL FRAMEWORK
Description of the Variables Used

Variable

Label

Measurement

Definition

REGRESSAND
PovHCR

Poverty Headcount
Ratio at National
Poverty Line

In percent (%)

A quantitative
variable that
indicates the
proportion of the
population whose
living standard is
below the national
poverty line.

REGRESSORS
AdolFert

Adolescent Fertility
Rate

Births per 1000

females aged 15 to
19

A quantitative
variable that is an
age-specific rate of
the number of births
for every 1000 girls at
ages 15 to 19 years
old.

UnRate

Unemployment Rate

In percent (%)

A quantitative
variable that
indicates the
proportion of the

15

labor force who do

not have work and
are available and are
looking for a job.
GDPpcPPP

GDP per Capita

based on Purchasing
Power Parity

Current US$

A quantitative
variable that
measures the total
output of the country
divided by the total
population and is
based on the
purchasing power
parity.

A-priori Expectations of Regressors

REGRESSOR
Adolescent Fertility Rate

INTUITION
Adolescent Fertility Rate

ALGEBRAIC SIGN OF THE

A-PRIORI EXPECTATION
(+)

measures the fertility rate

among girls aged 15 to 19.
According to the Culture of
Poverty Theory, poverty is
passed from one generation
to another due to the
conditions of the family like

16

having teenage mothers.

Therefore, as adolescent
fertility rate increases, the
poverty incidence increases
as well.
Unemployment Rate

Unemployment rate is a

(+)

measure of the proportion of

the labor force that do not
have jobs. In addition, jobs
are the most common source
of income of people so that
they can buy their needs and
wants. Thus, increases in
unemployment rate, increases
poverty.
GDP per Capita, PPP

The higher the GDP per

(-)

capita, PPP is, the better the

standard of living of people
living in a country is. It reflects
the ability of the individuals to
spend more for their needs
and wants. Therefore,
increases in GDP per capita,
PPP will yield to decreases in
poverty incidence.

17

Hypothesized Econometric Model

For the purpose of the study, the classical linear regression model will be used. This
functional form is also called the linear-linear model wherein the left-hand side of the model is in
linear form and the right-hand side of the model is also in linear form. The implication of this
model is that the absolute changes in the independent variables will yield to absolute changes in
the dependent variable. Therefore, we will write the hypothesized econometric model as:

= + + +

wherein 2 , 3, and 4 are the slopes of their respective regressors and 1 is a constant. The
term is called the stochastic disturbance term and it is added into the model to take into
account other variables and factors that affect the dependent variable which excludes the
independent variables. Later on, this model will be subjected to tests for misspecifications.

18

METHODOLOGY
Data and Estimation
For this research, there are 54 observations used. The observations represent the
countries. For a cross-section analysis, the number of observations is small but the data for the
independent and dependent variables are complete for all observations. The data that will be
used is for the year 2009 because compared to other years, 2009 has the most number of
results for the variables that will be used in this research. The data used for this research were
manually retrieved and gathered from the data bank of World Bank. The data set for this
research can be found at the appendix section.
The observations will be analyzed using the linear-linear model as discussed previously.
The hypothesized econometric model will undergo through the Problem of Estimation and
Problem of Inference. Under Problem of Estimation, parameters of the model are needed to be
estimated because in a population regression function (PRF), it is impossible to discover the
true relationship of the independent variables to the dependent variable. To estimate the
parameters of the model, regression analysis should be done. Another problem that the
hypothesized econometric model will face is the Problem of Inference. Under this problem, the
significance of estimates are being measured. For economic researches, the significance level
of 95% should be used to yield accurate results and interpretations. This implies that a p-value
of less than 0.05 will tell whether a variable is significant or not. In addition, the study should
also be in line with the Classic Linear Regression Model assumptions for useful regression
results interpretations (Gujarati & Porter, 2009).
In the next sections, tests will be conducted. By following the methods of economic
research, a proper model that shows the effects of some demographic factors and economic
factors on poverty. Furthermore, regression analysis in this study will be done through the

19

Ordinary Least Squares (OLS) method. As mentioned, Stata 12 and Gretl will be the software
that will be used to test and regress.

Summary of Observations (Descriptive Statistics)

Variable |
Obs
Mean
Std. Dev.
Min
Max
-------------+-------------------------------------------------------countryname |
0
povhcr |
54
26.08313
14.69235
3.8
63
adolfert |
54
52.34837
34.3323
3.107
152.6218
unrate |
54
10.21481
6.600755
1.5
32.2
gdppcppp |
54
10772.93
6794.559
821.2561
26965.25

The summarized table of observations shows that there are 54 observations with
complete data available for each variable. There are no observations for the variable
countryname because it does not have a numerical value and it only shows the name of the
countries included in the data set. For PovHCR, the average is 26.08313. Its standard deviation
is 14.69235 which shows the spread of poverty among the countries included in the data set.
The lowest poverty headcount ratio at national poverty line is 3.8 which is for Malaysia. On the
other hand, the highest poverty headcount ration at the national poverty line is 63 which is for
Swaziland.
For AdolFert which measures the occurrence of pregnancy for girls aged 15 to 19 years
old. The average occurrence is 52.34837. On the other hand, the standard deviation is 34.3323
which shows the spread of teenage pregnancy among countries included in the data set. The
country with the lowest adolescent fertility rate is Slovenia at 3.107. The country with most
adolescent fertility rate is Mozambique at 152.6218.
For the UnRate, the average inflation rates of the countries included in the observation is
10.21481. The standard deviation is 6.600755. The country that has the lowest unemployment

20

rate is Thailand which has 1.5 unemployment rate. On the other hand, the highest
unemployment rate among the countries included in the data set is 32.2 which is for Macedonia.
The GDP per capita, PPP which reflects the standard of living, has an average of
10772.93. The standard deviation 6794.559. In addition, the lowest GDP per capita, PPP is
821.2561 which is for Mozambique. The highest GDP per capita, PPP is 26965.25 which is for
Slovenia.
Because through central tendency theorem, there are still outliers that are not taken into
consideration after making interpretation for the data that was summarized, therefore,
regression analysis should be done to be able to evaluate the effect of the independent
variables to the dependent variable, which is the focus of this empirical analysis. In addition, the
gravity of the independent variables toward the dependent variable should also be interpreted to
be able to show the relationship among the variables.

21

EMPIRICAL RESULTS AND INTERPRETATION

Initial Regression
The table below, which was obtained using Stata 12, is the regression analysis
which resulted from the Ordinary Least Squares Model Estimation.
Source |
SS
df
MS
-------------+-----------------------------Model | 5886.51838
3 1962.17279
Residual | 5554.33079
50 111.086616
-------------+-----------------------------Total | 11440.8492
53 215.865079

Number of obs
F( 3,
50)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

54
17.66
0.0000
0.5145
0.4854
10.54

-----------------------------------------------------------------------------povhcr |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------adolfert |
.1746223
.0566056
3.08
0.003
.0609265
.288318
unrate |
.4006454
.2239691
1.79
0.080
-.0492099
.8505006
gdppcppp | -.0008106
.0002825
-2.87
0.006
-.001378
-.0002432
_cons |
21.58217
6.460102
3.34
0.002
8.606669
34.55766
------------------------------------------------------------------------------

By substituting the estimates that were obtained to the hypothesized econometric model,
the Problem of Estimation can be solved. Therefore, the Sample Regression Function (SRF) will
be written as:
= . + . + .

. +
The table above shows a lot of ways to prove whether the independent variables are
significant to the dependent variable.
Going to the Problem of Inference, one must remember that in social sciences, including
economics, the confidence interval that is used is 95% wherein the true value of the estimate is
included and that if the study will be repeated, 95% of the estimates will still fall within the
reference range or the two standard deviations of the mean. Furthermore, when making
inferences, the null hypothesis, which states that the independent variable has no relationship
with the dependent variable, should be tested. It is tested through the p-value. P-value is the
probability that if the null hypothesis is true, the data will be at least as high as what has been
22

observed. Therefore, when testing the hypothesis, the p-value should be less than 0.05 to be
able to reject the null hypothesis (Vickers, 2010).
From the results of the initial regression, of the three independent variables, only two are
significant to the dependent variable. Furthermore, from the results, the intercept of the sample
regression function is 21.58217 which means that even if the coefficients of the independent
variables are zero, poverty will still be 21.58217.
Adolescent Fertility Rate has a p-value of 0.003 which means that it is at the 95%
confidence interval because its p-value is less than 0.05. Furthermore, it shows that there is a
strong evidence against the null hypothesis because it is significant to poverty head count ratio
at national poverty line. It also has a positive coefficient which means that it is consistent with
the a-priori expectation. It also implies that it positively affects the poverty headcount ratio at the
national poverty. Since the coefficient is 0.1746223, this means that an increase in the rate at
which girls aged 15 to 19 years old get pregnant will increase the poverty headcount ratio at the
national poverty line by 0.1746223.
For the Unemployment Rate, it has a p-value of 0.080 which is clearly not less than 0.05;
thus, it is insignificant and we do not have enough grounds and evidence to reject the null
hypothesis. Even so, the coefficient of inflation rate is 0.4006454. The result of the regression
analysis is consistent with the a-priori expectation that inflation rate has a negative effect on
poverty headcount ratio at national poverty line. Thus, an increase in inflation rate leads to a
decrease of poverty headcount ratio by 0.4006454.
For the GDP per Capita based on the Purchasing Power Parity, the p-value is 0.005.
Because it is less than 0.05, it means that it falls within the 95% confidence interval.
Furthermore, because it has a significant relationship to the poverty headcount ratio at national
poverty line, the null hypothesis should be rejected. In addition, the result is consistent with the

23

a-priori expectation that it negatively affects the poverty headcount ratio at national poverty line.
The coefficient is -0.0008106 which denotes that an increase in GDP per Capita based on
Purchasing Power Parity will lead to a reduction in the poverty headcount ratio at national
poverty line by 0.0008106.
Other than the coefficients of the independent variables and the intercept, the coefficient
of determination can also be obtained from the initial regression. The coefficient of
determination and the goodness of fit of a model is measured through 2. The 2 shows the
proportion or percentage of the variation in the dependent variable that is explained by the
independent variables. Therefore, if 2 is closer to 1 or 100%, then the fit of the model is better
(Hill, Griffiths & Lim, 2011). From the initial regression, the 2 is 0.5145or 51.45%. It denotes
that 51.03% of the variations in the dependent variable is explained by the independent
variables. But because multiple regression analysis was used, it is better to measure the
goodness of fit through the adjusted 2. The adjusted 2 is 48.54%, which means that 48.54%
of the percentage of variations in Poverty Headcount Ratio at National Poverty Line is explained
by the independent variables such as Adolescent Fertility Rate, Inflation Rate and GDP per
Capita based on Purchasing Power Parity. However, the adjusted 2 is below 50% which may
imply bad fitting.
To know whether the assumptions of the Classical Linear Regression Model are met, a
number of tests should be done to be able to validate the model, as well as the interpretations
that can be taken from the analysis.

24

Test for Multicollinearity

One of the assumptions under the Classical Linear Regression Model is nonmulticollinearity. Non-multicollinearity assumption states that the independent variables do not
have exact or almost exact linear relationship. Furthermore, the explanatory variables should be
exogenous under this assumption. However, there are cases when the independent variables
are highly correlated. This violation is called multicollinearity. There are numerous symptoms
that is observed if there is multicollinearity and one of which is when R-squared is very high
while there are a few significant in t-values (Gujarati & Porter, 2009). In addition, when the
assumption of non-multicollinearity is violated, there is a high possibility of making a type II error
which is the rejection of a true null hypothesis.
There are a number of ways to measure the degree of multicollinearity. It can be
measured through auxiliary regressions such as auxiliary F-tests, VIF criterion, Lawrence Klein
rule and condition index criterion. In this research, the Variance Inflation Factor or VIF criterion
will be used to measure the extent of multicollinearity. The Variance Inflation Factor measures
the variance when the estimator is inflated when there is multicollinearity. Therefore, using Stata
12, the result of the test for multicollinearity is:
Variable |
VIF
1/VIF
-------------+---------------------adol |
1.80
0.554959
gdppcppp |
1.76
0.568877
unemp |
1.04
0.959008
-------------+---------------------Mean VIF |
1.53
If the mean VIF > 10, it means that there is multicollinearity in the model and it is
dangerous. On the contrary, if the mean VIF < 10, then the multicollinearity is tolerable and is
not dangerous. From the VIF test that was conducted, the mean VIF is 1.53. Since it is less than

25

10, then multicollinearity is tolerable and there is no need to correct the model for
multicollinearity.

Test for Heteroscedasticity

One of the Gauss-Markov assumptions is homoscedasticity. For a model to be
homoscedastic, then for any values of the independent variables, the variance of the error term
should be the same. In case the variance for the independent variables becomes different, it
means that the assumption of homoscedasticity is violated. This violation is called
heteroscedasticity (Wooldridge, 2013). Moreover, when there is heteroscedasticity in the model,
the OLS becomes inefficient; thus, it is no longer the Best Linear Unbiased Estimator (BLUE).
Therefore, the standard errors of the estimates become biased and may lead to the breakdown
of inference (Baltagi, 2011). In simple words, the variance should be constant for the model to
be homoscedastic, or else, there is heteroscedasticity.
There are formal tests that can be conducted to know whether there is
heteroscedasticity or not. The options are Spearman Rank correlation Test, Goldfeld-Quandt
Test, Glejser Test, Koenker-Basset Test, Whites Test and Breusch-Pagan Test. For this study,
two of the said tests will be conducted. Whites Test and Breusch-Pagan Test will be used.
Whites Test that shows the difference of the residual variance of the estimates if there is
homoscedasticity and the residual variance of the estimates if there is heteroscedasticity. On
the other hand, Breusch- Pagan Test, if F-test shows that the explanatory variables are jointly
significant, then the null hypothesis that there is constant variance or homoscedasticity can be
rejected (Baltagi, 2011). For the tests for heteroscedasticity, Gretl will be used.

26

The Whites Test for heteroscedasticity result is:

White's test for heteroskedasticity
OLS, using observations 1-54
Dependent variable: uhat^2
coefficient
std. error
t-ratio
p-value
---------------------------------------------------------------const
-347.274
306.256
-1.134
0.2630
AdolFert
8.23024
6.03654
1.363
0.1797
UnRate
29.6457
20.5859
1.440
0.1569
GDPPPP
0.0237675
0.0260243
0.9133
0.3661
sq_AdolFert
-0.0354863
0.0293254
-1.210
0.2327
X2_X3
-0.0857760
0.161969
-0.5296
0.5991
X2_X4
-0.000313388
0.000223702
-1.401
0.1683
sq_UnRate
-0.471810
0.373398
-1.264
0.2130
X3_X4
-0.000842520
0.000932037
-0.9040
0.3709
sq_GDPPPP
-4.08856e-07
7.05438e-07
-0.5796
0.5652
Unadjusted R-squared = 0.175653
Test statistic: TR^2 = 9.485244,
with p-value = P(Chi-square(9) > 9.485244) = 0.393739

The null hypothesis under the Whites Test is that there is homoscedasticity. To have
homoscedasticity, the p-value should be greater than 0.05. Since in this case, the p-value is
0.393739 which denotes that the null hypothesis should be accepted. Therefore, there is no
heteroscedasticity. Thus, there is homoscedasticity or constant variance.
Using the Breusch-Pagan Test, the result is:
Breusch-Pagan test for heteroskedasticity
OLS, using observations 1-54
Dependent variable: scaled uhat^2
coefficient
std. error
t-ratio
p-value
--------------------------------------------------------const
1.05767
0.878050
1.205
0.2340
AdolFert
0.00279564
0.00769378
0.3634
0.7179
UnRate
0.0358465
0.0304417
1.178
0.2446
GDPPPP
-5.29272e-05
3.83975e-05
-1.378
0.1742
Explained sum of squares = 12.2736
Test statistic: LM = 6.136804,
with p-value = P(Chi-square(3) > 6.136804) = 0.105141

27

The null hypothesis in using the Breusch-Pagan Test is that there is constant variance.
To have constant variance, the p-value should be greater than 0.05. In this case, the p-value is
0.105141. It means that the null hypothesis that there is constant variance should not be
rejected. Therefore, there is homoscedasticity.
Although heteroscedasticity is endemic in cross-section studies, by using the Whites
Test and Breusch-Pagan Test, it has been proven that there is no heteroscedasticity. Therefore,
the assumption of homoscedasticity is not violated and there is no need to correct the model.

Test for Misspecification

One of the assumptions in the Classical Linear Regression Model is that the model
should be correctly specified. A model is correctly specified if the independent variables are
exogenous and is independent from the error term. Misspecification occurs in models because
of the omission of an important variable, addition of irrelevant variables, use of wrong functional
form, errors of measurement bias, wrong specification of the stochastic error term and
assumption that the error term in normally distributed. (Gujarati & Porter, 2009).
It is important to test for misspecification because if there is specification bias, the OLS
will be biased and inconsistent. In order to know whether there is a misspecification, Ramseys
RESET Test should be conducted. Thus, the result of the test is:
Ramsey RESET test using powers of the fitted values of pov
Ho:

model has no omitted variables

F(3, 47) =

1.10

Prob > F =

0.3573

Under the Ramseys RESET Test, the null hypothesis is that the model has no omitted
variables. To confirm if there are omitted variables, the p-value should be greater than 0.05.
Because the p-value from the result is 0.3573, then there is no enough evidence that the model

28

has omitted variables. Therefore, the model is correctly specified and there is no need to
undergo corrective measures.

Test for Joint Significance

Even if we discovered from the OLS regression that AdolFert and GDPpcPPP have
significant relationship to PovHCR and UnRate has insignificant relationship to PovHCR, it is
still essential to test whether each independent variable is statistically significant to PovHCR.
For Adolescent Fertility Rate, the individual test of significance is:
( 1)

adolfert = 0
F(

1,
50) =
Prob > F =

9.46
0.0034

For AdolFert to be significant, the p-value should be less than 0.05. Because its p-value
is 0.0034, then AdolFert is individually significant. Thus, the null hypothesis that AdolFert does
not affect Poverty Headcount Ratio at National Poverty Line is rejected.
For Unemployment Rate, the individual test of significance is:
( 1)

unrate = 0
F(

1,
50) =
Prob > F =

2.81
0.0998

Because the p-value of UnRate is 0.0998 and it is greater than 0.05, then it is
individually insignificant. Thus, the null hypothesis should be accepted because we do not have
enough evidence against the null hypothesis.
Lastly, for GDP per Capita based on Purchasing Power Paritym the individual test of
significance is:
( 1)

gdppcppp = 0
F(

1,
50) =
Prob > F =

11.26
0.0015
29

Thus, because its p-value is 0.0015 is less than 0.05, then GDPpcPPP is individually
significant. Furthermore, the null hypothesis that GDPpcPPP does not affect the Poverty
Headcount Ratio at National Poverty Line is rejected.
Moreover, to know whether all variables should be included in the final model or not,
there is a need to conduct a test for joint significance. In testing for the joint significance,

0 = 1 = 2 = 3 = 4 = 0
= 0
The result of the test for significance is:
( 1)
( 2)
( 3)

adolfert = 0
unrate = 0
gdppcppp = 0
F(

3,
50) =
Prob > F =

18.65
0.0000

Since the null hypothesis for testing the joint significance is that all explanatory variables
does not affect the dependent variable, the p-value should be less than 0.05 for the null
hypothesis to be rejected. In this case, the p-value is 0.000. Thus, the null hypothesis is rejected
and the independent variables are jointly significant to the dependent variable.

30

FINAL REGRESSION MODEL

After conducting the tests to ensure that the model did not violate the assumptions of the
Classical Linear Regression Model and that the estimates that were taken from Ordinary Least
Squares (OLS) are the Best Linear Unbiased Estimates (BLUE), it can be concluded that the
model used for the initial regression is also the final regression model.

= . + . .
. +
Therefore, the interpretations for the initial regression will also be the interpretations that
will be used for the final model.

31

CONCLUSION AND RECOMMENDATIONS

This study aims to explain the effects of the Adolescent Fertility Rate, Unemployment
Rate and GDP per Capita based on the Purchasing Power Parity on the Poverty Headcount
Ratio at National Poverty Line. It also aims to provide basis and consideration when making
policies to be able to alleviate poverty. For this study, the model was in the form of linear-linear
model. Three explanatory variables were used such as Adolescent Fertility Rate,
Unemployment Rate and GDP per Capita based on PPP. To know if the variables meet the
assumptions of the Classical Linear Regression Model, the variables were tested for
multicollinearity, heteroscedasticity, misspecification and joint significance. The tests showed
that the variables used in the model did not violate any assumptions.
Using the interpretations that were led by the regression analysis, policy-makers and the
government can make policies and laws that will reduce the incidence of poverty. From the
study, it has been proven that adolescent fertility rate or teenage pregnancy increases poverty.
Because of this, policies that will control the incidence of teenage pregnancy can be imposed.
One of the most common ways to implement this is to have sex education as part of the
curriculum in secondary school. Furthermore, GDP per capita based on PPP was also proven
as a significant economic factor in poverty alleviation. Therefore, implementation of policies that
will boost the growth of the economy can be done so that the GDP per capita based on PPP will
increase which will lead to a better standard of living of people.
To be able to improve this study, a data with more observations can be used to be able
to yield more accurate results and interpretations. Therefore, there is a need to do more data
gathering to have more observations. In addition, adding more explanatory variables may also
be incorporated in the model to be able to consider other economic factors that also affects
poverty.

32

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35

APPENDIX
Country Name
Armenia
Azerbaijan
Belarus
Bolivia
Botswana
Brazil
Bulgaria
Burkina Faso
Cambodia
Colombia
Croatia
Czech Republic
Dominican Republic
Ecuador
Egypt, Arab Rep.
El Salvador
Estonia
Fiji
Georgia
Honduras
Hungary
Indonesia
Jamaica
Kazakhstan
Kyrgyz Republic
Latvia
Lithuania
Macedonia, FYR
Malaysia
Moldova
Montenegro
Mozambique
Namibia
Nicaragua
Panama
Papua New Guinea
Paraguay
Peru
Philippines

PovHCR
34.1
10.9
5.4
51.3
19.3
13.289279
20.7
46.7
23.9
40.3
20.5
9
42.1
36
21.6
37.8
15.8
35.2
17.4
58.8
12.3
14.2
16.5
8.2
31.7
20.9
20.5
27.3
3.8
26.3
6.8
54.7
28.7
42.5
33.4
39.9
35.1
33.5
26.3

AdolFert
UnRate
GDPpcPPP
27.6634
18.700001
6160.796915
40.3024
5.6999998
14916.82905
21.8248
9.8000002
14097.96277
75.67039
3.4000001
4992.785951
48.9668
18.4
11962.42307
73.6644
8.3000002
12767.24044
39.6244
6.8000002
14004.50178
123.9538
3.3
1310.262592
45.9176
1.9
2333.997381
71.9942
12
10184.81688
13.2454
9.1000004
19337.28075
8.6326
6.6999998
25992.99706
105.0558
14.9
9488.895406
80.9152
6.5
8629.862031
46.4144
9.3999996
9953.749408
80.0224
7.3000002
6957.102474
20.4972
13.8
20036.12116
44.2846
8.6999998
7197.364384
89.445
3.3
4069.721675
49.2404
16.9
5479.689486
16.5946
10
20438.54076
50.2342
7.9000001
7420.578294
74.41
11.4
8261.870074
28.8102
6.5999999
17953.19574
29.5598
8.3999996
2749.110434
16.3042
17.1
16926.63134
15.5968
13.7
18061.43382
20.7118
32.200001
11022.09826
9.9732
3.7
18713.34029
31.9932
6.4000001
3535.096176
17.2262
19.1
13157.53918
152.6218
7.5999999
821.2561309
66.6132
29.700001
7756.385498
107.9396
6.6999998
3787.386514
82.1634
6.5999999
13894.81508
64.975
2.4
1940.561817
70.1664
6.5
6110.534007
53.118
4.4000001
8959.750066
51.1656
7.5
5139.67824
36

Poland
Romania
Russian Federation
Slovak Republic
Slovenia
Sudan
Swaziland
Tajikistan
Thailand
Turkey
Uganda
Ukraine
Uruguay
Venezuela, RB
West Bank and Gaza

17.6
21.1
13
12
12.7
46.5
63
47.2
19.1
4.4
24.5
5.8
20.9
31.8
26.2

13.851
30.913
27.8654
18.7502
3.107
97.5566
81.5848
44.0048
40.7616
35.9672
140.6172
28.74
59.985
87.2282
48.3674

8.1999998
6.9000001
8.3000002
12.1
5.9000001
14.8
22.9
11.6
1.5
14
4.1999998
8.8000002
7.3000002
7.8000002
24.5

18972.88081
15587.94056
19486.18215
22893.85498
26965.2457
3200.846399
6296.870609
1966.473999
11545.96329
14715.08878
1224.944675
7277.517192
14794.71114
16527.99585
3757.648025

37