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International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food

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  • Ingvild Almås

Abstract

Purchasing power adjusted incomes applied in cross-country comparisons are measured with bias. In this paper, we estimate the purchasing power parity (PPP) bias in Penn World Table incomes and provide corrected incomes. The bias is substantial and systematic: the poorer a country, the more its income tends to be overestimated. Consequently, international income inequality is substantially underestimated. Our methodological contribution is to exploit the analogies between PPP bias and the bias in consumer price index (CPI) numbers. The PPP bias and subsequent corrected incomes are measured by estimating Engel curves for food, which is an established method of measuring CPI bias.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3247.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3247

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  1. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  2. Timothy Beatty & Erling Røed Larsen, 2005. "Using Engel curves to estimate bias in the Canadian CPI as a cost of living index," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(2), pages 482-499, May.
  3. Nelson, Julie A, 1990. "Quantity Aggregation in Consumer Demand Analysis When Physical Quantities Are Observed," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 153-56, February.
  4. Dora L. Costa, 2001. "Estimating Real Income in the United States from 1888 to 1994: Correcting CPI Bias Using Engel Curves," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(6), pages 1288-1310, December.
  5. D. Coondoo & A. Majumder & R. Ray, 2001. "On a Method of Calculating Regional Price Differentials with Illustrative Evidence from India," ASARC Working Papers, The Australian National University, Australia South Asia Research Centre 2001-06, The Australian National University, Australia South Asia Research Centre.
  6. D. Coondoo & A. Majumder & R. Ray, 2004. "A Method of Calculating Regional Consumer Price Differentials with Illustrative Evidence from India," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 50(1), pages 51-68, 03.
  7. Xavier Sala-i-Martin, 2006. "The World Distribution of Income: Falling Poverty and ... Convergence, Period," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(2), pages 351-397, May.
  8. Angus Deaton, 2004. "Measuring poverty in a growing world (or measuring growth in a poor world)," Working Papers, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies. 178, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  9. Steve Dowrick & Muhammad Akmal, 2005. "Contradictory Trends In Global Income Inequality: A Tale Of Two Biases ," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 51(2), pages 201-229, 06.
  10. Yatchew,Adonis, 2003. "Semiparametric Regression for the Applied Econometrician," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521812832.
  11. 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, International Association for Research in Income and Wealth, vol. 51(4), pages 561-570, December.
  12. Frank T. Denton & Dean C. Mountain, 2002. "Aggregation Effects on Price and Expenditure Elasticities in a Quadratic Almost Ideal Demand System," Quantitative Studies in Economics and Population Research Reports, McMaster University 374, McMaster University.
  13. Hill, Robert J., 2000. "Measuring substitution bias in international comparisons based on additive purchasing power parity methods," European Economic Review, Elsevier, Elsevier, vol. 44(1), pages 145-162, January.
  14. Richard Blundell & Alan Duncan & Krishna Pendakur, 1998. "Semiparametric estimation and consumer demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(5), pages 435-461.
  15. 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, International Association for Research in Income and Wealth, vol. 51(4), pages 571-580, December.
  16. Deaton, Angus, 1987. "Estimation of own- and cross-price elasticities from household survey data," Journal of Econometrics, Elsevier, Elsevier, vol. 36(1-2), pages 7-30.
  17. McKelvey, Christopher, 2011. "Price, unit value, and quality demanded," Journal of Development Economics, Elsevier, Elsevier, vol. 95(2), pages 157-169, July.
  18. Angus Deaton, 2005. "ERRATUM: Measuring Poverty in a Growing World (or Measuring Growth in a Poor World)," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 395-395, May.
  19. Irineu E. Carvalho Filho & Marcos Chamon, 2006. "The Myth of Post-Reform Income Stagnation in Brazil," IMF Working Papers, International Monetary Fund 06/275, International Monetary Fund.
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Cited by:
  1. Filho, Irineu de Carvalho & Chamon, Marcos, 2012. "The myth of post-reform income stagnation: Evidence from Brazil and Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 97(2), pages 368-386.
  2. Amita Majumder & Ranjan Ray & Kompal Sinha, 2011. "Estimating Intra Country and Cross Country Purchasing Power Parities from Household Expenditure Data Using Single Equation and Complete Demand Systems Approach: India and Vietnam," Development Research Unit Working Paper Series, Monash University, Department of Economics 34-11, Monash University, Department of Economics.
  3. Lant Pritchett, Marla Spivack, 2013. "Estimating Income/Expenditure Differences across Populations: New Fun with Old Engel's Law-Working Paper 339," Working Papers, Center for Global Development 339, Center for Global Development.
  4. Kaus, Wolfhard, 2013. "Beyond Engel's law - A cross-country analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 47(C), pages 118-134.
  5. Emi Nakamura & Jón Steinsson & Miao Liu, 2014. "Are Chinese Growth and Inflation Too Smooth? Evidence from Engel Curves," NBER Working Papers 19893, National Bureau of Economic Research, Inc.
  6. Amita Majumder & Ranjan Ray & Kompal Sinha, 2012. "Spatial Comparisons of Prices and Expenditure in a Heterogeneous Country: Methodology with Application to India," Development Research Unit Working Paper Series, Monash University, Department of Economics 19-12, Monash University, Department of Economics.
  7. Trevon D. Logan, 2008. "Are Engel Curve Estimates of CPI Bias Biased?," NBER Working Papers 13870, National Bureau of Economic Research, Inc.
  8. Sudhir Anand & Paul Segal, 2014. "The Global Distribution of Income," Economics Series Working Papers, University of Oxford, Department of Economics 714, University of Oxford, Department of Economics.

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