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The Assessment of National Price Levels

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  • Irving B. Kravis
  • Robert E. Lipsey

Abstract

This paper attempts to find norms for long-run national price levels,and therefore, by implication, for exchange rates, that are superior to those implied by the absolute or relative versions of purchasing power parity theory. The structural variables we have found to determine these price levels, real income per capita, the openness of the economy, and the share of tradables in total output, are used to explain price levels in periods since 1960 and to some extent since 1950.The results suggest that there was a movement toward a more "orderly" alignment of price levels, especially in the period before the 1970's. That is,national price levels came to be explained to an increasing degree by our structural variables. The price levels implied by the structural equations appear to come closer to representing long-run equilibrium levels than do those implied by purchasing power parity. The deviations from the structural equations seem to have value inpredicting future changes in price levels or real exchange rates,in conbination with changes in the structural variables. And they also contribute to predicting changes in the balance of trade.

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File URL: http://www.nber.org/papers/w1912.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1912.

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Date of creation: May 1986
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Publication status: published as Kravis, Irving B. and Robert E. Lipsey."The Assessment of National Price Levels," Real-Financial Linkages among Open Economies, eds. Sven W. Arndt & J . David Richardson, Cambridge, MA: MIT Press, Fall 1987.
Handle: RePEc:nbr:nberwo:1912

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  1. Kravis, Irving B, 1984. "Comparative Studies of National Incomes and Prices," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 1-39, March.
  2. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(374), pages 279-86, June.
  3. Clague, Christopher, 1986. "Determinants of the National Price Level: Some Empirical Results," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 320-23, May.
  4. Kravis, Irving B & Heston, Alan W & Summers, Robert, 1978. "Real GDP per Capita for More Than One Hundred Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(350), pages 215-42, June.
  5. Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, Elsevier, vol. 8(2), pages 193-246, May.
  6. Peter Hill, 1984. "Real Gross Product in OECD Countries and Associated Purchasing Power Parities," OECD Economics Department Working Papers 17, OECD Publishing.
  7. Bushe, Dennis M & Kravis, Irving B & Lipsey, Robert E, 1986. "Prices, Activity, and Machinery Exports: An Analysis Based on New Price Data," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 248-55, May.
  8. Berglas, Eitan & Razin, Assaf, 1973. "Real exchange rate and devaluation," Journal of International Economics, Elsevier, Elsevier, vol. 3(2), pages 179-191, May.
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