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Estimating Intra Country and Cross Country Purchasing Power Parities from Household Expenditure Data Using Single Equation and Complete Demand Systems Approach: India and Vietnam

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  • Amita Majumder
  • Ranjan Ray
  • Kompal Sinha

Abstract

This study departs from the previous literature on purchasing power parity (PPP) by proposing a demand system based methodology for calculating the PPP that takes account of consumer preferences and allows for the substitution effect of price changes. The methodology is applied to provide evidence on PPP between the Indian Rupee and the Vietnamese Dong. The study is conducted within a framework that allows for regional variation in preferences and price changes both inside the country and between countries and proposes and applies a methodology for constructing prices from unit values after adjusting them for quality and demographic effects. Using these prices the intra-country PPPs for India and Vietnam are calculated using the single equation (Engel curve based) procedure of Coondoo, Majumder and Chattopadhyay (2011). The cross country PPPs are calculated between sectors and across expenditure classes, apart from PPP at aggregate country to country level, using both the single equation and system based procedures. The paper contains evidence that the incorporation of price effects leads to a significant change in the PPP rates obtained from using cross section data (single equation procedure) ignoring price changes. The demand system based methodology yields PPP rates that are consistent with those obtained from conventional procedures such as the CPD method, yields standard errors of the PPPs and has the additional advantage of testing for invariance of inter-country PPP across expenditure classes. The disaggregated PPP rates question the conventional practice of using a single economy wide PPP in inequality and poverty comparisons.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 34-11.

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Length: 40 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:mos:moswps:2011-34

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Related research

Keywords: Purchasing Power Parity; QAIDS; CPD method; Spatial Prices; TCLI.;

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References

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  1. Ravallion, Martin & Datt, Gaurav & van de Walle, Dominique, 1991. "Quantifying Absolute Poverty in the Developing World," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(4), pages 345-61, December.
  2. John Gibson & Scott Rozelle, 2005. "Prices and Unit Values in Poverty Measurement and Tax Reform Analysis," World Bank Economic Review, World Bank Group, vol. 19(1), pages 69-97.
  3. Kenneth W. Clements & Yanrui Wu & Jing Zhang, 2004. "Comparing International Consumption Patterns," Economics Discussion / Working Papers 04-04, The University of Western Australia, Department of Economics.
  4. 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, vol. 50(1), pages 51-68, 03.
  5. Ingvild Almas, 2012. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," American Economic Review, American Economic Association, vol. 102(2), pages 1093-1117, April.
  6. Amita Majumder & Ranjan Ray & Kompal Sinha, 2011. "The Calculation of Rural Urban Food Price Differentials from Unit Values in Household Expenditure Surveys: A new procedure and comparison with existing methods," Development Research Unit Working Paper Series 24-11, Monash University, Department of Economics.
  7. Vinod Mishra & Ranjan Ray, 2009. "Dietary Diversity, Food Security and Undernourishment: The Vietnamese Evidence ," Asian Economic Journal, East Asian Economic Association, vol. 23(2), pages 225-247, 06.
  8. Dipankor Coondoo & Amita Majumder & Somnath Chattopadhyay, 2011. "Estimating Spatial Consumer Price Indices Through Engel Curve Analysis," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57(1), pages 138-155, 03.
  9. Hill, Robert J., 2000. "Measuring substitution bias in international comparisons based on additive purchasing power parity methods," European Economic Review, Elsevier, vol. 44(1), pages 145-162, January.
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Cited by:
  1. 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 19-12, Monash University, Department of Economics.

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