IDEAS home Printed from https://ideas.repec.org/a/eee/econom/v191y2016i2p414-425.html
   My bibliography  Save this article

Stochastic approach to computation of purchasing power parities in the International Comparison Program (ICP)

Author

Listed:
  • Rao, D.S. Prasada
  • Hajargasht, Gholamreza

Abstract

The paper presents a stochastic approach based on the country-product-dummy (CPD) method for the computation of purchasing power parities (PPPs) in the International Comparison Program. The approach develops estimation strategies in conjunction with the country-product-dummy method to derive a range of multilateral index number methods for the compilation of PPPs at the basic heading level as well as at higher levels of aggregation. At the basic heading level our approach generates Jevons geometric index, arithmetic and harmonic indexes as well as the Dutot index. At higher levels of aggregation, a weighted stochastic model with alternative stochastic specifications and the method of moments (MOM) are used to derive the Geary–Khamis, Iklé, Rao and other multilateral index number methods employed in international comparisons. Expressions for computing standard errors for PPPs based on these formulae are also derived. Existence of solutions to the estimating equations derived from the weighted method of moments or the maximum weighted likelihood is also discussed. A numerical illustration based on ICP 2005 data is presented.

Suggested Citation

  • Rao, D.S. Prasada & Hajargasht, Gholamreza, 2016. "Stochastic approach to computation of purchasing power parities in the International Comparison Program (ICP)," Journal of Econometrics, Elsevier, vol. 191(2), pages 414-425.
    • Handle: RePEc:eee:econom:v:191:y:2016:i:2:p:414-425
    DOI: 10.1016/j.jeconom.2015.12.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304407615002882
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeconom.2015.12.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. D. S. Prasada Rao, 2005. "On The Equivalence Of Weighted Country‐Product‐Dummy (Cpd) Method And The Rao‐System For Multilateral Price Comparisons," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 571-580, December.
    2. Kenneth W. Clements & H.Y Izan & E Antony Selvanathan, 2005. "Stochastic Index Numbers: A Review," Economics Discussion / Working Papers 05-08, The University of Western Australia, Department of Economics.
    3. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    4. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
    5. Erwin Diewert, 2005. "Weighted Country Product Dummy Variable Regressions And Index Number Formulae," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 561-570, December.
    6. Gholamreza Hajargasht & D. S. Prasada Rao, 2010. "Stochastic Approach To Index Numbers For Multilateral Price Comparisons And Their Standard Errors," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 32-58, June.
    7. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March.
    8. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    9. Clements, Kenneth W & Izan, H Y, 1981. "A Note on Estimating Divisia Index Numbers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 745-747, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sebastian Weinand, 2022. "Measuring spatial price differentials at the basic heading level: a comparison of stochastic index number methods," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 106(1), pages 117-143, March.
    2. Hajargasht, Gholamreza & Rao, D.S. Prasada, 2019. "Multilateral index number systems for international price comparisons: Properties, existence and uniqueness," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 36-47.
    3. Diewert, Erwin, 2019. "Quality Adjustment and Hedonics: A Unified Approach," Microeconomics.ca working papers erwin_diewert-2019-2, Vancouver School of Economics, revised 14 Mar 2019.
    4. Laureti Tiziana & Polidoro Federico, 2022. "Using Scanner Data for Computing Consumer Spatial Price Indexes at Regional Level: An Empirical Application for Grocery Products in Italy," Journal of Official Statistics, Sciendo, vol. 38(1), pages 23-56, March.
    5. Ranjan Ray, 2017. "The Role of Prices in Welfare Comparisons: Methodological Developments and a Selective Survey of the Empirical Literature," The Economic Record, The Economic Society of Australia, vol. 93(301), pages 314-332, June.
    6. von Auer, Ludwig & Weinand, Sebastian, 2022. "A nonlinear generalization of the country-product-dummy method," Discussion Papers 45/2022, Deutsche Bundesbank.
    7. Adam Gorajek, 2018. "Econometric Perspectives on Economic Measurement," RBA Research Discussion Papers rdp2018-08, Reserve Bank of Australia.
    8. Cassetta, Ernesto & Nava, Consuelo R. & Zoia, Maria Grazia, 2022. "A three-step procedure to investigate the convergence of electricity and natural gas prices in the European Union," Energy Economics, Elsevier, vol. 105(C).
    9. Robert Inklaar & D. S. Prasada Rao, 2017. "Cross-Country Income Levels over Time: Did the Developing World Suddenly Become Much Richer?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 265-290, January.
    10. Weinand, Sebastian, 2020. "Measuring spatial price differentials: A comparison of stochastic index number methods," Discussion Papers 12/2020, Deutsche Bundesbank.
    11. Gholamreza Hajargasht, 2022. "Reliability of Ideal Indexes," Papers 2210.13684, arXiv.org.
    12. José‐María Montero & Tiziana Laureti & Román Mínguez & Gema Fernández‐Avilés, 2020. "A Stochastic Model with Penalized Coefficients for Spatial Price Comparisons: An Application to Regional Price Indexes in Italy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(3), pages 512-533, September.
    13. Laureti, Tiziana & Prasada Rao, D.S., 2018. "Measuring Spatial Price Level Differences within a Country: Current status and Future Developments /Medición de las diferencias de nivel de precios espaciales dentro de un país: Estado actual y evoluc," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 36, pages 119-148, Enero.
    14. Chihiro Shimizu & Erwin Diewert, 2023. "Scanner Data, Product Churn and Quality Adjustment," Working Papers e185, Tokyo Center for Economic Research.
    15. Chunyun Wang & Xiaoxi Yu & Jiang Zhao, 2022. "Identifying the Real Income Disparity in Prefecture-Level Cities in China: Measurement of Subnational Purchasing Power Parity Based on the Stochastic Approach," Sustainability, MDPI, vol. 14(16), pages 1-24, August.
    16. Reza Hajargasht & Robert J. Hill & D. S. Prasada Rao & Sriram Shankar, 2018. "Spatial Chaining in International Comparisons of Prices and Real Incomes," Graz Economics Papers 2018-03, University of Graz, Department of Economics.
    17. Consuelo Nava & Maria Grazia Zoia, 2019. "An econometric analysis of the Italian cultural supply," Papers 1910.00073, arXiv.org, revised May 2020.
    18. Ilaria Benedetti & Tiziana Laureti & Luigi Palumbo & Brandon M. Rose, 2022. "Computation of High-Frequency Sub-National Spatial Consumer Price Indexes Using Web Scraping Techniques," Economies, MDPI, vol. 10(4), pages 1-20, April.
    19. Consuelo R. Nava & Antonio Pesce & Maria Grazia Zoia, 2019. "A new proposal for the construction of a multi-period/multilateral price index," DISCE - Quaderni del Dipartimento di Politica Economica dipe0007, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    20. Benedetti Ilaria & Laureti Tiziana & Biggeri Luigi, 2022. "Sub-National Spatial Price Indexes for Housing: Methodological Issues and Computation for Italy," Journal of Official Statistics, Sciendo, vol. 38(1), pages 57-82, March.
    21. Hajargasht, Gholamreza & Prasada Rao, D.S. & Valadkhani, Abbas, 2019. "Reliability of basic heading PPPs," Economics Letters, Elsevier, vol. 180(C), pages 102-107.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sebastian Weinand, 2022. "Measuring spatial price differentials at the basic heading level: a comparison of stochastic index number methods," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 106(1), pages 117-143, March.
    2. Robert J. Hill & Alice O. Nakamura, 2010. "Improving Inflation And Related Performance Measures For Nations: An Introduction," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 1-10, June.
    3. Gholamreza Hajargasht & D. S. Prasada Rao, 2010. "Stochastic Approach To Index Numbers For Multilateral Price Comparisons And Their Standard Errors," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 32-58, June.
    4. D.S. Prasada Rao, 2004. "The Country-Product-Dummy Method: A Stochastic Approach to the Computation of Purchasing Power Parities in the ICP," CEPA Working Papers Series WP032004, School of Economics, University of Queensland, Australia.
    5. Diewert, W. Erwin & Fox, Kevin J., 2017. "Substitution Bias in Multilateral Methods for CPI Construction using Scanner Data," Microeconomics.ca working papers erwin_diewert-2017-3, Vancouver School of Economics, revised 23 Mar 2017.
    6. Ivancic, Lorraine & Erwin Diewert, W. & Fox, Kevin J., 2011. "Scanner data, time aggregation and the construction of price indexes," Journal of Econometrics, Elsevier, vol. 161(1), pages 24-35, March.
    7. Amita Majumder & Ranjan Ray, 2020. "National and subnational purchasing power parity: a review," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(2), pages 103-124, June.
    8. Barbara Casu & Claudia Girardone, 2004. "An Analysis of the Relevance of Off-Balance Sheet Items in Explaining Productivity Change in European Banking," Money Macro and Finance (MMF) Research Group Conference 2004 37, Money Macro and Finance Research Group.
    9. Casu, Barbara & Girardone, Claudia & Molyneux, Philip, 2004. "Productivity change in European banking: A comparison of parametric and non-parametric approaches," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2521-2540, October.
    10. Hajargasht, Gholamreza & Rao, D.S. Prasada, 2019. "Multilateral index number systems for international price comparisons: Properties, existence and uniqueness," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 36-47.
    11. Daniel Melser & Michael Webster, 2021. "Multilateral Methods, Substitution Bias, and Chain Drift: Some Empirical Comparisons," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 67(3), pages 759-785, September.
    12. W. Erwin Diewert, 1995. "Price and Volume Measures in the System of National Accounts," NBER Working Papers 5103, National Bureau of Economic Research, Inc.
    13. Zelenyuk, Valentin, 2020. "Aggregation of inputs and outputs prior to Data Envelopment Analysis under big data," European Journal of Operational Research, Elsevier, vol. 282(1), pages 172-187.
    14. Aradhyula, Satheesh Venkata, 1989. "Policy structure, output supply and input demand for US crops," ISU General Staff Papers 198901010800009909, Iowa State University, Department of Economics.
    15. Fox, Kevin J. & Grafton, R. Quentin & Kirkley, James & Squires, Dale, 2003. "Property rights in a fishery: regulatory change and firm performance," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 156-177, July.
    16. Craig, Barbara J. & Pardey, Philip G., 1990. "Multidimensional Output Indices," Staff Papers 13828, University of Minnesota, Department of Applied Economics.
    17. W. Erwin Diewert, 2022. "Scanner Data, Elementary Price Indexes and the Chain Drift Problem," Springer Books, in: Duangkamon Chotikapanich & Alicia N. Rambaldi & Nicholas Rohde (ed.), Advances in Economic Measurement, chapter 0, pages 445-606, Springer.
    18. Adam Gorajek, 2018. "Econometric Perspectives on Economic Measurement," RBA Research Discussion Papers rdp2018-08, Reserve Bank of Australia.
    19. Ludwig Auer, 2012. "Räumliche Preisvergleiche: Aggregationskonzepte und Forschungsperspektiven," AStA Wirtschafts- und Sozialstatistisches Archiv, Springer;Deutsche Statistische Gesellschaft - German Statistical Society, vol. 6(1), pages 27-56, December.
    20. Ranjan Ray, 2017. "The Role of Prices in Welfare Comparisons: Methodological Developments and a Selective Survey of the Empirical Literature," The Economic Record, The Economic Society of Australia, vol. 93(301), pages 314-332, June.

    More about this item

    Keywords

    Purchasing power parities; International Comparison Program; Stochastic approach; Non-additive linear models; Method of moments; Standard errors;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:191:y:2016:i:2:p:414-425. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jeconom .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.