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Axiomatic and Economic Approaches to International Comparisons

In: International and Interarea Comparisons of Income, Output, and Prices

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  • W. Erwin Diewert

Abstract

The paper considers the problem of choosing a multilateral system of index numbers in order to make aggregate price and quantity comparisons between many countries and regions. The problems involved in choosing functional forms in order to make these comparisons are both theoretically and empirically more difficult than the problems involved in choosing a bilateral index number formula. The great variation in relative prices and quantities in the international context means that the choice of a multilateral method is empirically important: different methods will give very different answers. The paper reviews ten classes of multilateral methods both from the viewpoint of the axiomatic approach as well as the economic approach. A new system of 11 desirable axioms or properties for multilateral systems is suggested. With respect to the economic approach, the concept of a superlative bilateral index number formula (which can adequately model substitution effects) is adapted to the multilateral context. Each of the 10 classes of multilateral methods is evaluated from the axiomatic and economic perspectives. Four classes of methods are identified as being `best' They are all superlative and satisfy slightly different sets of axioms.

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This chapter was published in:

  • Alan Heston & Robert E. Lipsey, 1999. "International and Interarea Comparisons of Income, Output, and Prices," NBER Books, National Bureau of Economic Research, Inc, number hest99-1, octubre-d.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8385.

    Handle: RePEc:nbr:nberch:8385

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    Cited by:
    1. Barnett, William A. & Diewert, W. Erwin & Zellner, Arnold, 2009. "Introduction to Measurement with Theory," MPRA Paper 14868, University Library of Munich, Germany.
    2. Angus Deaton & Alan Heston, 2010. "Understanding PPPs and PPP-Based National Accounts," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 1-35, October.
    3. Aten, Bettina & Heston, Alan, 2003. "Regional Output Differences in International Perspective," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    4. Tomasz Kuszewski & Agata Sielska, 2010. "The Useful art of the social-economic Rankings," Contemporary Economics, University of Finance and Management in Warsaw, vol. 4(1), March.
    5. Takanobu Nakajima & Alice Nakamura & Emi Nakamura & Masao Nakamura, 2007. "Technical change in a bubble economy: Japanese manufacturing firms in the 1990s," Empirica, Springer, vol. 34(3), pages 247-271, July.
    6. Richard Grieve & Richard Nixon & Simon G. Thompson & Charles Normand, 2005. "Using multilevel models for assessing the variability of multinational resource use and cost data," Health Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 185-196.
    7. Diewert, Erwin & Fox, Kevin J. & Ivancic, Lorraine, 2009. "Scanner Data, Time Aggregation and the Construction of Price Indexes," Economics working papers erwin_diewert-2009-48, Vancouver School of Economics, revised 22 Sep 2009.
    8. Diewert, Erwin, 2008. "New Methodology for Linking the Regions," Economics working papers erwin_diewert-2008-9, Vancouver School of Economics, revised 09 Sep 2008.
    9. Robert C. Feenstra & Alan Heston & Marcel P. Timmer & Haiyan Deng, 2009. "Estimating Real Production and Expenditures across Nations: A Proposal for Improving the Penn World Tables," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 201-212, February.
    10. Neary, J Peter, 2000. "True Multilateral Indexes for International Comparisons of Real Income: Theory and Empirics," CEPR Discussion Papers 2590, C.E.P.R. Discussion Papers.
    11. Travis D. Nesmith, 2006. "Rational seasonality," Finance and Economics Discussion Series 2007-04, Board of Governors of the Federal Reserve System (U.S.).
    12. Mick Silver, 2009. "The Hedonic Country Product Dummy Method and Quality Adjustments for Purchasing Power Parity Calculations," IMF Working Papers 09/271, International Monetary Fund.
    13. Almås, Ingvild & Sørensen, Erik Ø., 2012. "Global Income Inequality and Cost-of-Living Adjustment: The Geary–Allen World Accounts," Discussion Paper Series in Economics 20/2012, Department of Economics, Norwegian School of Economics.
    14. Magne Mogstad, 2007. "Measuring Income Inequality under Restricted Interpersonal Comparability," Discussion Papers 498, Research Department of Statistics Norway.

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