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

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  • Ingvild Almas

Abstract

Purchasing power-adjusted incomes applied in cross-country comparisons are measured with bias. This paper estimates the purchasing power parity (PPP) bias in Penn World Table incomes and provides 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. The 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, an established method of measuring CPI bias. (JEL C43, D31, E31, O11, O12)

Suggested Citation

  • 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.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:2:p:1093-1117
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    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F01 - International Economics - - General - - - Global Outlook

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