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Poverty is multidimensional. It is not only the lack of money but also the lack or deprivation of food, clothing,
shelter and other basic needs. This study aims to look at factors that could contribute to the either reduction or
increase of poverty. Argentina and Colombia are used for this study because the similarities in their culture and
availability of data on poverty.
THEORY
Foreign aid is inversely related to poverty.
In Thomas Malthuss view on population, poverty existed because of the increase on family size and population. In
other words, there is a direct relationship between population and poverty.
Unemployment is directly related to poverty
Mathematical Model
Phcr = a + b D1 - c fa_pop + d pop + e unemp +
Econometric Model
Phcr = 1 + 2country 3 fa_pop + 4 pop + 5 unemp +
Data
Let:
phcr = poverty headcount ratio at $1.25 (PPP) (% population) or percentage of population below $1.25 a day is
the percentage of the population living on less than $1.25 a day at 2005 international prices.
pop = population density or people per sq. km of land area
unemp = Unemployment refers to the share of the labor force that is without work but available for and
seeking employment. (expressed as percentage)
fa pop = total foreign aid received by country divided by the total population
Year
phcr
pop
unemp
country
fa pop
1991
0.55
12.09256
5.8
8.269882
1992
1.77
12.25569
6.7
7.867615
1993
2.05
12.4172
10.1
6.657635
1994
1.93
12.57737
12.1
4.248068
1995
3.88
12.73625
18.8
4.090069
1996
4.27
12.89408
17.2
3.706169
1997
3.77
13.05041
14.9
2.856229
1998
13.20378
12.8
2.187928
1999
16.18
35.24349
20.1
7.713287
1999
4.21
13.35227
14.1
2.095179
2000
17.85
35.83972
16.2
4.676069
2000
5.12
13.49466
15
1.42131
2001
19.18
36.43317
14.6
9.508543
2001
8.27
13.63038
18.3
3.902192
2002
20.26
37.02401
14.6
10.67234
2002
12.57
13.76018
17.9
2.164784
2003
19.61
37.61326
12
19.17885
2003
9.79
13.88584
16.1
2.806223
2004
18.98
38.20253
11.9
12.14442
2004
6.29
14.00991
12.6
2.38232
2005
12.71
38.79275
11.3
14.4171
2005
4.55
14.13429
10.6
2.486481
2006
11.04
39.38399
10.5
23.00503
2006
3.69
14.25951
10.1
2.948966
2007
8.84
39.97506
12
16.29723
2007
2.71
14.38529
8.5
2.574168
2008
11.32
40.56402
13.2
21.59745
2008
1.94
14.5118
7.8
3.287985
2009
9.67
41.1483
12
23.20605
2009
2.01
14.63902
8.6
3.16331
2010
8.16
41.72586
11.6
19.46394
ECONOMETRIC ESTIMATION:
Dependent Variable: PHCR
Method: Least Squares
Date: 04/05/13 Time: 22:33
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
FA_POP
POP
UNEMP
C
-25.53890
-0.273859
-0.502158
0.365271
33.09468
10.56922
0.171569
0.456526
0.165326
16.72472
-2.416345
-1.596198
-1.099955
2.209397
1.978789
0.0230
0.1225
0.2814
0.0362
0.0585
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.817770
0.789735
2.839037
209.5635
-73.60821
29.16929
0.000000
8.295806
6.191384
5.071497
5.302785
5.146891
0.693282
Interpretation of parameters:
1 : Holding all other factors constant, the average poverty headcount ratio for Colombia is 33.09468;
2 : Holding all other factors constant, the poverty headcount ratio in Argentina is 25.54 lower than Colombia or
7.55;
3 : Holding all other factors constant, a one dollar increase in the financial aid per capita will bring about a
0.273859 decrease in poverty headcount ratio;
4: Holding all other factors constant, a one unit increase in the population density will bring about a 0.502158 in
the poverty headcount ratio;
5: Holding all other factors constant, a one percent increase in the unemployment rate will bring about a
0.365271 increase in the poverty headcount ratio;
HYPOTHESIS TESTING
Confidence Interval: mean + z (se)
Coefficient Confidence Intervals
Date: 04/05/13 Time: 22:49
Sample: 1 31
Included observations: 31
95% CI
Variable
Coefficient
Low
High
COUNTRY
FA_POP
POP
UNEMP
C
-25.53890
-0.273859
-0.502158
0.365271
33.09468
-47.26425
-0.626524
-1.440561
0.025438
-1.283465
-3.813545
0.078807
0.436245
0.705103
67.47283
1 :
H0 : 1 = 0
HA : 1 0
= 0.05
95% confidence interval for 1 : - 1.283465 < 0 < 67.47283
Decision: within acceptance region therefore, accept null hypothesis
2 :
H0 : 2 = 0
HA : 2 0
= 0.05
95% confidence interval for 2 : -47.26425 < 0 < -3.813545
Decision: not within acceptance region therefore, reject null hypothesis
Therefore, there is a significant difference between the poverty headcount ratio in Argentina and
Colombia.
3 :
H0 : 3 = 0
HA : 3 0
= 0.05
95% confidence interval for 3 : -0.626524 < 0 < 0.078807
Decision: within acceptance region therefore, accept null hypothesis
4 :
H0 : 4 = 0
HA : 4 0
= 0.05
95% confidence interval for 4 : -1.440561 < 0 < 0.436245
Decision: within acceptance region therefore, accept null hypothesis
5 :
H0 : 5 = 0
HA : 5 0
= 0.05
95% confidence interval for 5 : 0.025438 < 0 < 0.705103
Decision: not within acceptance region therefore, reject null hypothesis
T-Statistics
1 :
H0 : 1 = 0
HA : 1 0
= 0.05
df = 26
|t-computed| > 2
1.978789 < 2
Decision: accept null hypothesis
2 :
H0 : 2 = 0
HA : 2 0
= 0.05
df = 26
|t-computed| > 2
|-2.416345 | > 2
Decision: reject null hypothesis
Therefore, there is a significant difference between the poverty headcount ratio in Argentina and
Colombia.
3 :
H0 : 3 = 0
HA : 3 0
= 0.05
df = 26
|t-computed| > 2
|-1.596198| < 2
Decision: accept null hypothesis
4 :
H0 : 4 = 0
HA : 4 0
= 0.05
df = 26
|t-computed| > 2
|-1.099955 | < 2
Decision: accept null hypothesis
5 :
H0 : 5 = 0
HA : 5 0
= 0.05
df = 26
|t-computed| > 2
2.209397 > 2
Decision: rejectt null hypothesis
1 :
P-value
2:
3:
4 :
5:
F-statistics
H0: 2 = 3 = 4 = 5 = 0
H a: 2 3 4 5 0
29.16929 > 2.74
~together they affect the phcr
TEST FOR VIOLATIONS IN LINEAR REGRESSION MODEL:
A.) Test for multicollinearity
Coefficient
Std. Error
t-Statistic
Prob.
POP
UNEMP
C
0.486433
-0.479562
2.999198
0.049918
0.174282
2.515641
9.744693
-2.751635
1.192220
0.0000
0.0103
0.2432
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.779661
0.763923
3.405208
324.6723
-80.39395
49.53849
0.000000
8.096671
7.008360
5.380255
5.519028
5.425491
1.069220
Coefficient
Std. Error
t-Statistic
Prob.
FA_POP
UNEMP
C
1.587644
0.820773
-0.255633
0.162924
0.319195
4.658469
9.744693
2.571380
-0.054875
0.0000
0.0157
0.9566
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.773553
0.757378
6.151895
1059.683
-98.72903
47.82461
0.000000
23.13667
12.48947
6.563163
6.701936
6.608400
0.879725
Coefficient
Std. Error
t-Statistic
Prob.
FA_POP
POP
C
-0.443849
0.232746
11.04743
0.161304
0.090514
1.340047
-2.751635
2.571380
8.244065
0.0103
0.0157
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.217247
0.161336
3.275962
300.4940
-79.19442
3.885580
0.032415
12.83871
3.577213
5.302866
5.441639
5.348103
0.666413
2
0
-2
-4
-6
2
10
12
14
Residual
16
18
Actual
20
22
24
Fitted
26
28
30
There is a pattern or trend in the residual and actual data that could signify a possible presence of
autocorrelation.
2.) Scatter Diagram Residual over time
8
6
RESID
4
2
0
-2
-4
-6
1,988
1,992
1,996
2,000
2,004
2,008
2,012
YEAR
There is a funnel-like pattern in the scatter diagram of the residuals that could signify a possible
presence of autocorrelation
3.) Scatter Diagram lag one year
8
6
RESID(-1)
4
2
0
-2
-4
-6
-6
-4
-2
RESID
The computed Durbin-Watson (d) is within the area of rejection. The null hypothesis being that there is no
positive/negative autocorrelation. Therefore, there is an evidence of positive autocorrelation.
C.) Test for Heteroscedasticity
White test:
Heteroskedasticity Test: White
F-statistic
Obs*R-squared
0.0341
0.0813
Scaled explained SS
0.2747
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/06/13 Time: 13:54
Sample: 1 31
Included observations: 31
Collinear test regressors dropped from specification
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
COUNTRY
COUNTRY*FA_POP
COUNTRY*POP
COUNTRY*UNEMP
FA_POP
FA_POP^2
FA_POP*POP
FA_POP*UNEMP
POP
POP^2
POP*UNEMP
UNEMP
UNEMP^2
5413.494
-4724.017
-83.78442
209.0466
8.560592
126.3815
0.437886
-3.645820
0.070589
-327.8109
4.905131
0.383378
-10.97473
-0.014521
2648.631
2281.942
32.02742
87.84950
18.14012
47.93621
0.345080
1.565566
0.359776
138.5014
1.939248
0.693922
31.08336
0.227444
2.043884
-2.070174
-2.616021
2.379599
0.471915
2.636452
1.268939
-2.328756
0.196202
-2.366841
2.529398
0.552481
-0.353074
-0.063842
0.0568
0.0540
0.0181
0.0293
0.6430
0.0173
0.2216
0.0325
0.8468
0.0301
0.0216
0.5878
0.7284
0.9498
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.664478
0.407902
7.744937
1019.729
-98.13332
2.589793
0.034073
6.760112
10.06517
7.234408
7.882015
7.445511
1.446013
The computed chi-squared is 20.59882 is greater than the chi-squared on the table that is 15.379.
Therefore, there is a presence of heteroscedasticity.
REMEDIES:
Change functional forms:
1.) Log log
log phcr = 1 + 2country log 3fa_pop + log 4 pop + log 5 unemp +
Dependent Variable: LOG(PHCR)
Method: Least Squares
Date: 04/06/13 Time: 15:15
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
LOG(FA_POP)
LOG(POP)
LOG(UNEMP)
C
0.767321
-0.285859
2.282177
1.382523
-8.515398
1.277708
0.164693
1.137871
0.261666
4.475091
0.600545
-1.735707
2.005656
5.283548
-1.902844
0.5533
0.0945
0.0554
0.0000
0.0682
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.872063
0.852380
0.345981
3.112271
-8.358258
44.30623
0.000000
1.785435
0.900492
0.861823
1.093111
0.937217
0.726203
P value for intercept, financial aid and population is higher than alpha of .05 and the sign of the
intercept does not meet my expectations in the model.
2.) Log lin
log phcr = 1 + 2country 3fa_pop + 4 pop + 5 unemp +
Dependent Variable: LOG(PHCR)
Method: Least Squares
Date: 04/06/13 Time: 15:18
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
FA_POP
POP
UNEMP
C
1.438562
-0.047700
0.130148
0.113722
-3.181288
1.475763
0.023956
0.063744
0.023084
2.335243
0.974792
-1.991138
2.041729
4.926408
-1.362294
0.3386
0.0571
0.0514
0.0000
0.1848
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.832049
0.806211
0.396410
4.085662
-12.57629
32.20187
0.000000
1.785435
0.900492
1.133954
1.365242
1.209348
0.825437
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
LOG(FA_POP)
LOG(POP)
LOG(UNEMP)
C
-27.75136
-3.038738
-12.99972
3.908363
59.82216
10.95718
1.412353
9.757988
2.243955
38.37685
-2.532710
-2.151543
-1.332214
1.741729
1.558809
0.0177
0.0409
0.1944
0.0934
0.1311
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.800971
0.770352
2.967013
228.8823
-74.97502
26.15862
0.000000
8.295806
6.191384
5.159678
5.390967
5.235073
0.554326
Drop a variable
1.) Drop fa_pop
phcr = 1 + 2country 3pop + 4 unemo +
Dependent Variable: PHCR
Method: Least Squares
Date: 04/06/13 Time: 15:24
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
POP
UNEMP
C
-32.21570
-0.897592
0.461770
42.87967
9.980601
0.394301
0.158225
16.00056
-3.227831
-2.276415
2.918438
2.679885
0.0033
0.0310
0.0070
0.0124
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.799913
0.777681
2.919281
230.0995
-75.05722
35.98043
0.000000
8.295806
6.191384
5.100466
5.285497
5.160781
0.718579
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
FA_POP
UNEMP
C
-14.12734
-0.376267
0.374605
15.19157
2.026946
0.144670
0.165748
3.862073
-6.969765
-2.600865
2.260079
3.933527
0.0000
0.0149
0.0321
0.0005
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.809290
0.788100
2.850052
219.3154
-74.31321
38.19218
0.000000
8.295806
6.191384
5.052465
5.237496
5.112781
0.528258
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
FA_POP
POP
C
-28.72776
-0.412473
-0.553931
42.05891
11.19753
0.170780
0.487595
17.35220
-2.565544
-2.415239
-1.136046
2.423837
0.0162
0.0228
0.2659
0.0223
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.783557
0.759508
3.036253
248.9085
-76.27512
32.58143
0.000000
8.295806
6.191384
5.179040
5.364070
5.239355
0.509843
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
UNEMP
C
-9.629917
0.576842
6.792110
1.161298
0.160740
2.325851
-8.292372
3.588655
2.920269
0.0000
0.0013
0.0068
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.761511
0.744476
3.129708
274.2621
-77.77860
44.70282
0.000000
8.295806
6.191384
5.211522
5.350295
5.256759
1.024152
FINAL MODEL:
Phcr = 1 + 2country 3fa_pop + 4unemp
Dependent Variable: PHCR
Method: Least Squares
Date: 04/06/13 Time: 15:24
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
COUNTRY
FA_POP
UNEMP
C
-14.12734
-0.376267
0.374605
15.19157
2.026946
0.144670
0.165748
3.862073
-6.969765
-2.600865
2.260079
3.933527
0.0000
0.0149
0.0321
0.0005
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.809290
0.788100
2.850052
219.3154
-74.31321
38.19218
0.000000
8.295806
6.191384
5.052465
5.237496
5.112781
0.528258
4: Holding all other factors constant, a one percent increase in the unemployment rate will bring about a
0.374605 increase in the poverty headcount ratio;
TEST FOR VIOLATIONS ON LINEAR REGRESSION MODEL
A.) Test for multicollinearity:
1.) Correlation Matrix:
FA_POP
1.000000
-0.180014
FA_POP
UNEMP
UNEMP
-0.180014
1.000000
Coefficient
Std. Error
t-Statistic
Prob.
UNEMP
C
-0.352678
12.62460
0.357865
4.763992
-0.985505
2.650004
0.3325
0.0129
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.032405
-0.000960
7.011724
1425.764
-103.3285
0.971220
0.332528
8.096671
7.008360
6.795385
6.887901
6.825543
3.158815
VIF =
VIF =
VIF = 1.033
There is no presence of multicollinearity
Coefficient
Std. Error
t-Statistic
Prob.
FA_POP
C
-0.091883
13.58266
0.093234
0.991484
-0.985505
13.69931
0.3325
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.032405
-0.000960
3.578930
371.4534
-82.48036
0.971220
0.332528
12.83871
3.577213
5.450346
5.542861
5.480503
1.254813
VIF =
VIF =
VIF = 1.033
There is no presence of multicollinearity
B.) Test for Autocorrelation:
1.) Scatter Diagram Lag one year
8
6
4
RESID(-1)
2
0
-2
-4
-6
-8
-8
-6
-4
-2
RESID
The scatter diagram does not show any pattern that could determine a presence of
autocorreation
0.0216
0.0353
0.2748
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/07/13 Time: 00:43
Sample: 1 31
Included observations: 31
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
COUNTRY^2
COUNTRY*FA_POP
COUNTRY*UNEMP
FA_POP^2
FA_POP*UNEMP
UNEMP^2
17.09951
-45.33370
0.932483
3.118968
-0.141107
0.304853
-0.105017
18.51716
29.83057
1.790135
1.545324
0.062238
0.161792
0.056577
0.923441
-1.519706
0.520901
2.018326
-2.267211
1.884221
-1.856193
0.3650
0.1417
0.6072
0.0549
0.0327
0.0717
0.0757
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.436496
0.295620
11.08786
2950.578
-114.6015
3.098444
0.021629
11.12892
13.21127
7.845259
8.169063
7.950811
2.206336
The computed chi-square, 13.53138 is less than the chi-square distribution of 16.1513.
Therefore, there is no heteroscedasticity
HYPOTHESIS TESTING:
A.) Confidence intervals:
Coefficient Confidence Intervals
Date: 04/07/13 Time: 00:49
Sample: 1 31
Included observations: 31
95% CI
Variable
Coefficient
Low
High
COUNTRY
FA_POP
UNEMP
C
-14.12734
-0.376267
0.374605
15.19157
-18.28629
-0.673105
0.034517
7.267250
-9.968390
-0.079429
0.714693
23.11589
H0 : 1 = 0
HA : 1 0
= 0.05
95% confidence interval for 1 : 7.267250 < 1 < 23.11589
Decision: not within acceptance region therefore, reject null hypothesis
2:
H0 : 2 = 0
HA : 2 0
= 0.05
95% confidence interval for 2 : -18.28629 < 2 < -9.968390
Decision: not within acceptance region therefore, reject null hypothesis
3:
H0 : 3 = 0
HA : 3 0
= 0.05
95% confidence interval for 3 : -0.673105 < 3 < -0.079429
Decision: not within acceptance region therefore, reject null hypothesis
4:
H0 : 4 = 0
HA : 4 0
= 0.05
95% confidence interval for 4 : 0.034517 < 4 < 0.714693
Decision: not within acceptance region therefore, reject null hypothesis
B.) T-statistics
1 :
H0 : 1 = 0
HA : 1 0
= 0.05
|t-computed| > 2
3.933527 > 2
Decision: reject H0
2:
H0 : 1 = 0
HA : 1 0
= 0.05
|t-computed| > 2
|-6.969765| > 2
Decision: reject H0
3:
H0 : 3 = 0
HA : 3 0
= 0.05
|t-computed| > 2
| -2.600865 | > 2
Decision: reject H0
4:
H0 : 4 = 0
HA : 4 0
= 0.05
|t-computed| > 2
2.260079 > 2
Decision: reject H0
C.) P-value
1 :
Decision: Reject H0
2:
3:
4:
D.) F-statistics
H0: 2 = 3 = 4 = 0
H a: 2 3 4 0
3.098444 > 2.95
~together they affect the phcr