FINAL PROJECT OF

ECONOMETRICS
Submitted to: Dr. Khalid Ahmed
Submitted
by :
Rajib Ali
Amar Kumar
Shahaied

Sukkur IBA

The IMPACT of INTEREST RATE, INFLATION &

GDP per capita income on POVERTY: A study
in Pakistan
Abstract:
The main goal of this article was to examine the effect of various macroeconomic factors
on the welfare of the poor in Pakistan, through yearly time series data from 2002-2015. In
this article, we study through yearly time series data from 2002-2015, the multiple
regression model of regression technique was used to find out the relationship between
poverty, inflation, interest rate and GDP per capita income. Poverty (Head Count Index)
as dependent variable, on the other side inflation, Interest rate and GDP per capita income
were considered as independent variables. The study findings showed that inflation has
positive impact on poverty while GDP per capita and interest rate has negative impact on
poverty. Looking at the result of our study, we can conclude that, the reduction in poverty
in Pakistan is to be driven by the changes in the macroeconomic variables.

Key words: Poverty, inflation, interest rate, and GDP per capita.
Introduction:
Poverty is a multidimensional situation. Poverty is a condition where individuals
necessities for food, shelter, and clothing are not being met. Poverty has two part, one is
absolute poverty and other one is relative poverty. Absolute poverty happens when
individuals can't acquire sufficient resources (measured regarding calories) to have a base
level of physical wellbeing. It implies about the same all over the place, and it can be
eliminated as showed by a few nations. On the other hand, relative poverty is the
situation where people are behind the minimum amount of income need to maintain the
normal living standard in the community where they live. It is the basic and easiest way
to find out the situation of poverty in a country. If we look at Pakistan, absolute and
relative poverty both exist. Absolute poverty refers to the lack of fundamental necessities,
health, education, shelter, and clothing. Relative poverty defines as an absence of socially

Sukkur IBA
acceptable income and other factors(resources) as compared to other communities. If we
raise a question that which poverty can be alleviated completely, so the answer would be
absolute poverty. But relative poverty is dynamic concept and the presences of it is in
areas of the world. Poverty always measured in monetary related terms. The reasons for
poverty are multidimensional. Reason might be in form of physical, mental
(psychological), monetary (money related), cultural. Normally poverty line is the best
measure of poverty. It is considered as minimum income level of people to meet the basic
needs to survive in the society.
GDP stand for gross domestic product. As our variable is GDP per capita
income, it is the average income of everyone within an economy. One cannot misinterpret
that, it is the mean distribution of income of an economy. GDP per capita income is
calculated It is calculated by putting total income in numerator then dividing it with the
total population in an economy. It is also one of the factor that affects poverty.

A rate which is paid for the utilization of cash, while it also the cost of
debt. Cost of debt is expressed as annual percentage of loan. The formula for calculating
the interest rate is interest amount divided by amount of debt. Inflation is main factor, due
to which interest rate changes in the economy. Interest rate is another factor which affects
poverty.
Inflation refers to the raise in price level of goods and services in an
economy over a period of time. Inflation is the important factor in an economy. It gives
important understanding on the economic situation of an economy and give us ideas for
macroeconomic procedures to overcome it. Stable and constant prices provide a
developed setting for the economic growth and help us to eradicate the poor one who are

Sukkur IBA
the most accessible in society. Pakistan is a country where inflation is considered a major
problem and it creates difficulties in progress of country. Inflation also affects poverty.

Main objectives of our study:

To look at the situation of poverty in Pakistan over time
To understand the effect of interest rate, GDP per capita & inflation growth on
poverty
To improve the growth rate of defined variables
Recommendation to improve the situation in Pakistan.

Literature Review:
Richard (2002) in his study Macroeconomics adjustment the poor:
Analysis and evidence proved with regression run for cross country that there is a
connection between poverty and macroeconomic variables. Result showed that income
inequality, illiteracy and negative growth rates tends to increase poverty, while reduction
in real exchange rate and output growth reduces the poverty levels.
Jamal (2006) Analyzed at macro level relation of poverty, growth,
and inequality (1979-2002): He found that there was a positive relation between income
inequality and GDP per capita, and concluded that sector wage gap, inflation and the
terms of trade worsens the inequality. He also elaborated that how less level of income
inequality helps poverty alleviation. And, suggested that adaption of policies to control
and decrease the poverty and inequality.
Adeyemii, Ilaiyaaa and Raheem (2009) in their study Determinants
of poverty sub-Sahara Africa: In this they used data of 48 countries and used multiple
technique. The research suggested that factors like increase in inflation, external debt,

Sukkur IBA
gender discrimination, regional and ethnic clash, and population increases the level of
poverty in this region. Study also suggested debt forgiveness, family planning and
making economic variables stable can yield better results for controlling poverty.
Chaudhary, Rana Malik, and Hassan (2009) the impact of socioeconomic and demographic variable on poverty: The results show that house hold size,
dependency on household, number of livestock and landholdings have impact on poverty.
It was concluded that land should be given to landless households and improve must be
made in socio-economic and demographic factors.

Methodology:
In this research article, we use different tools and techniques to find out the required accurate
results. This article is comprising on the impact of three macroeconomic variables (GDP per
capita income, interest rate and inflation) on poverty. We have taken 14-year data from 2002 to
2015. We have used multi regression model to analyze the effect of these variables. With the help
of EVIEWS, we have run the regression and find out the degree of impact of independent
variables on one dependent variable (poverty). To check out multicollinearity among
independent variable, we have used correlation matrix.

Variables of the model:

We have included four variables in our research article. Including poverty as dependent
variable using poverty headcounts as proxy variable. However, inflation, interest rate and
GDP per capita as independent variables and CPI, Deposit interest rates and GDP per
capita us $ based 2010 as proxies respectively . All four variables are taken in % (percentage)
form.

The functional form of the model:

Y=0 + 1INT+2INF+3LnGDP+i

Sukkur IBA
Y =POV= Poverty (Poverty Headcount Ratio)

X1 =INF= Inflation (CPI)

X2 =GDP= GDP per capita income (BASED US $ 2010)

X3 =INT= Interest Rates (Deposit Interest Rates)

i = Error

Hypothesis for study:

Inflation (raise in prices) has a substantial(significant) impact on poverty
There is a significant impact of interest rate growth on the poverty
GDP Per capita income causes change in the level of poverty

Correlation Matrix:
Correlation is a statistical method which can show how strongly combinations
of variables are associated. The key outcome of a correlation is known as correlation
coefficient ("r"). It has range from -1.0 to +1.0. The near r is to +1 or -1, the more
closely the combination of variables is associated.

RELATIONSHIP AMONG VARIABLES:

Sukkur IBA
The relationship among the variables poverty, GDP per capita income, interest rates and
inflation over the period of 2002-2015 in Pakistan is clearly visible in correlation matrix.
All variables have impact on poverty whereas GDP per capita has significance inverse
correlated with the poverty. Moreover, inflation and interest rate have also negative
correlation with poverty. There is no any pair of independent variables which has very
high degree of collinearity (more than .8). How the GDP per capita income is very close
to the poverty variable and we can say that this is the main variable that may impact
directly on poverty. The negative sign in matrix is just showing the nature of relationship
between two variables. Like in the case of poverty and GDP per capita income if GDP per
capita income increases then poverty will have decreased the negative or opposite impact
of one variable on another variable.

Result and interpretations:

In the table given above is showing the results of our regression analysis. The variable y
that is a dependent variable is poverty and the other macroeconomic variables that are
independent variables such as inflation, GDP per capita income, and interest rates. The
R2 is showing that here is 93.19% effect of our independent variables on dependent
variable (poverty) this is also indicating the effectiveness of our regression equation and
degree of fit.

Sukkur IBA
The coefficient column is showing that the degree of relationship of our independent
variables to dependent variable. As the effect of interest rate on poverty is negative and
the degree is 1.645 that means if we increase the interest rate by 1% the poverty will
decrease by 1.645%. On the other hand, inflation has positive impacts on poverty by
0.646 that means by increasing inflation by 1% the poverty will increase by 0.646%. The
reason is because due to increase in general price level always decrease the purchasing
power and thus poverty increases.
By taking 5% level of significance if we see in probability column. Our all null
hypotheses are rejected and thus we except our all alternative hypothesis that our all three
independent variables (Inflation, GDP per capita and interest rate) are impacting the
poverty.
when we see the column of probability the interest rates are significance that means the
interest rates are impacting on poverty however the inflation is also insignificance that
means the inflation do impact on poverty and so is with GDP per capita income.
The third and most important independent variable is GDP per capita income that is
highly related with poverty with coefficient of -0.078 that means by 1% increase in GDP
per capita income poverty will decrease by 0.078% and the probability 0% is showing
that the results are statistically significance. however apart from all independent factors
the constant poverty if all independent variables become zero the poverty ratio will be
124 still.

Conclusion:
Considering the empirical examination got through the econometric investigations of the
time series information, it was found that these factors like GDP per capita and interest
rate had the inverse or negative association with poverty, the explanation for was that
GDP per capita contributed towards the improvement of per capita salary of the general
population prompting to poverty decline. Looking at the other side inflation had positive

Sukkur IBA
connection with poverty. Explanation of inflation is that, because of it price level will
increase and people has no money to fulfil their needs.

Suggestions and policy implications:

Based on our study these are suggestions to improve the situation in Pakistan.
Gross domestic product development rate ought to be enhanced it in consistent
basis. Government has selected development situated approaches to advance
maintained monetary development with the assistance of financial, fiscal and
exchange motivations.
GDP (per capita salary) ought to be expanded and would not be went with
compounding the circulation of salary. GDP per capita wage ought to be expanded
instead of the perceived wage. If the expansion in per capita income is more
noteworthy than the increment in swelling, this will prompt to build the way of life
of the individuals and poverty will fall.
Constant rising level of prices hurt the buyers; reduce the acquiring power
prompting to poverty. In such manner, the strict value observing framework ought
to be built up in economy.
Deposit interest rate has negative impact on incensement in poverty, so the
government should subsidies the people and encourage them to deposit more and
earn more. In this way, there income will increase.
So, in the light of our studys findings of the review
government ought to acquire steadiness macroeconomic factors and execute such
development arranged and adjustment arrangements particularly at full scale level
which will accommodating for decrease in poverty.

Sukkur IBA

References:
Govt of Pakistan (2002), Pakistan Economic Survey 2002-03, Ministry of
Finance
Govt of Pakistan
Govt of Pakistan (2008), Pakistan Economic Survey 2008-09, Ministry of
Finance
Govt of Pakistan
Gujarati, D. N (2003), Basic Econometrics, McGraw Hill Education, fourth
edition,
pp. 300 560
Chani, M.I., Zahid Pervaiz, Sajjad Ahmed Jan, Amjad Ali and Amanat R Chaudhary
(2011), Poverty Inflation and Economic Growth: Evidence from Pakistan, World
Applied Science Journal, 14(7), 1058-1063
Adeyemi, S.L., Gafar T Ijayia and Usman A Raheem (2009), Determinants of
Poverty in
Sub Sahara Africa, International Multi Disciplinary Journal Ethopia, Vol. 3, No. 2
Agenor, P.R (1998), Poverty Income distribution and Labor market Issues in Sub
Sahara Africa, Collaborative Research Project, CR-2-3
World Bank
UNDP wesite
Data:
interest rate
GDP per
inflation Ln GDP per
years
%
poverty % capita
%
capita
200
2
1.6000
56.97 857.7670281
3.240
6.75
200
3
0.0160
54.52 881.1371945
2.870
6.78
200
4
1.6000
51.7 927.0732501
7.430
6.83
200
5
2.6000
50.4 978.0532647
9.080
6.89
200
6
4.1700
47.18 1017.455841
7.910
6.93
200
7
5.3000
44.1 1044.973751
7.600
6.95
200
8
6.9000
42.284 1041.058922
20.150
6.95

Sukkur IBA
200
9

8.7000

39.8

1048.525792

13.940

6.96

8.1000

36.8

1043.300205

13.900

6.95

8.2000

36.3

1049.59451

11.900

6.96

8.0000

32.5

1063.60578

9.700

6.97

7.2000

29.5

1086.773417

7.700

6.99

7.3000

27

1114.575887

7.200

7.02

6.0000

25.15

1152.140531

2.530

7.05

201
0
201
1
201
2
201
3
201
4
201
5