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Disparities in Incomes and Prices Internationally

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  • Kenneth W Clements

    (Business School, University of Western Australia)

  • Grace Gao

    (Business School, University of Western Australia)

  • Thomas Simpson

    (Business School, University of Western Australia)

Abstract

The dispersion of the distribution of relative prices in poor countries is substantially higher than that in the rich. As in 130+ countries relative prices are closely related to incomes, we develop a model that shows that the prices of luxuries (necessities) rise (fall) with income growth. This model provides a link between price dispersion and incomes that leads to several interesting concepts, including minimum-variance income and dispersion-equivalent income, the income needed to compensate for higher dispersion, which are illustrated with data from the International Comparison Program. The paper also contains an analysis of the welfare cost of higher dispersion in poorer countries.

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File URL: http://www.business.uwa.edu.au/__data/assets/pdf_file/0010/2068426/12-01-Disparities-in-Incomes-and-Prices-Internationally.pdf
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Bibliographic Info

Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 12-01.

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Length: 56 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:uwa:wpaper:12-01

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  1. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  2. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  3. Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
  4. Taylor, Alan M & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers.
  5. Selvanathan, E. Antony, 1985. "An even simpler differential demand system," Economics Letters, Elsevier, vol. 19(4), pages 343-347.
  6. Kenneth W Clements & Dongling Chen, 2009. "AFFLUENCE AND FOOD A Simple Way to Infer Incomes," Economics Discussion / Working Papers 09-08, The University of Western Australia, Department of Economics.
  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Ina Simonovska, 2010. "Income Differences and Prices of Tradables: Insights from an Online Retailer," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
  9. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
  10. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
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