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Trying to Understand the PPPs in ICP 2011: Why Are the Results So Different?

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  • Angus Deaton
  • Bettina Aten

Abstract

Purchasing power parity exchange rates, or PPPs, are price indexes that summarize prices in each country relative to a numeraire country, typically the United States. These numbers are used to compare living standards across countries, by academics in studies of economic growth, particularly through the Penn World Table, by the World Bank to construct measures of global poverty, by the European Union to redistribute resources, and by the international development community to draw attention to discrepancies between rich and poor countries. The International Comparison Program (ICP) collects the detailed prices on which these indexes are based on an irregular basis. In 2014, the ICP published PPPs from the 2011 round that are sharply different from those that were expected from extrapolation of the previous round, ICP 2005. These discrepancies will eventually have important implications for the Penn World Table, and for international comparisons of living standards given that the PPPs are used to convert countries' national accounts--GDP and consumption, for example--from local currency to common currency units (international dollars.) The world according to ICP 2011 looks markedly more equal than the world according to ICP 2005. This paper investigates why this happened. We identify a likely source of the problem in the way that the regions of the ICP were linked in 2005. We use two different methods for measuring the size of the effect. Both suggest that the 2005 PPPs for consumption for countries in Asia (excluding Japan), Western Asia, and Africa were overstated relative to the United States by between 18 to 26 percent. Per capita consumption in international dollars of these countries was therefore too low in 2005 and more likely to be accurately estimated in 2011.

Suggested Citation

  • Angus Deaton & Bettina Aten, 2017. "Trying to Understand the PPPs in ICP 2011: Why Are the Results So Different?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 243-264, January.
  • Handle: RePEc:aea:aejmac:v:9:y:2017:i:1:p:243-64
    Note: DOI: 10.1257/mac.20150153
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    References listed on IDEAS

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    1. Angus Deaton, 2010. "Price Indexes, Inequality, and the Measurement of World Poverty," American Economic Review, American Economic Association, vol. 100(1), pages 5-34, March.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
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    1. repec:eee:wdevel:v:105:y:2018:i:c:p:201-216 is not listed on IDEAS
    2. Jolliffe, Dean & Prydz, Espen Beer, 2015. "Global Poverty Goals and Prices: How Purchasing Power Parity Matters," IZA Discussion Papers 9064, Institute for the Study of Labor (IZA).
    3. Francisco H. G. Ferreira & Shaohua Chen & Andrew Dabalen & Yuri Dikhanov & Nada Hamadeh & Dean Jolliffe & Ambar Narayan & Espen Beer Prydz & Ana Revenga & Prem Sangraula & Umar Serajuddin & Nobuo Yosh, 2016. "A global count of the extreme poor in 2012: data issues, methodology and initial results," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 14(2), pages 141-172, June.
    4. Nicholas Oulton, 2015. "Space-Time (In)Consistency in the National Accounts: Causes and Cures," Discussion Papers 1524, Centre for Macroeconomics (CFM), revised Oct 2015.
    5. Nicholas Oulton, 2018. "GDP and the System of National Accounts: Past, Present and Future," Discussion Papers 1802, Centre for Macroeconomics (CFM), revised Jun 2018.
    6. Inklaar, Robert & de Jong, Harmen & Bolt, Jutta & van Zanden, Jan, 2018. "Rebasing 'Maddison': new income comparisons and the shape of long-run economic development," GGDC Research Memorandum GD-174, Groningen Growth and Development Centre, University of Groningen.
    7. Timothy Smeeding & Jonathan Latner, 2015. "PovcalNet, WDI and ‘All the Ginis’: a critical review," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 13(4), pages 603-628, December.
    8. Robert Inklaar & D. S. Prasada Rao, 2017. "Cross-Country Income Levels over Time: Did the Developing World Suddenly Become Much Richer?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 265-290, January.
    9. Thomas Goda & Alejandro Torres, 2015. "Class or location? What explains the rising tide of absolute global income inequality during 1850-2010?," DOCUMENTOS DE TRABAJO CIEF 012663, UNIVERSIDAD EAFIT.
    10. Ali Hosseiny, 2015. "Violation of Invariance of Measurement for GDP Growth Rate and its Consequences," Papers 1507.04848, arXiv.org, revised Aug 2016.
    11. Asger Moll Wingender, 2014. "Structural transformation in the 20th century: A new database on agricultural employment around the world," Discussion Papers 14-28, University of Copenhagen. Department of Economics.
    12. Anand, Sudhir & Segal, Paul, 2017. "Who Are the Global Top 1%?," World Development, Elsevier, vol. 95(C), pages 111-126.
    13. Veenstra, Joost, 2015. "Output growth in German manufacturing, 1907–1936. A reinterpretation of time-series evidence," Explorations in Economic History, Elsevier, vol. 57(C), pages 38-49.
    14. Thomas Goda & Alejandro Torres García, 2017. "The Rising Tide of Absolute Global Income Inequality During 1850–2010: Is It Driven by Inequality Within or Between Countries?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 130(3), pages 1051-1072, February.
    15. Kevin Stahler & Arvind Subramanian, 2014. "Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework," Working Paper Series WP14-10, Peterson Institute for International Economics.
    16. Andrew J. Hussey & Michael Jetter & Dianne McWilliam, 2017. "Explaining Inequality Between Countries: The Declining Role of Political Institutions," CESifo Working Paper Series 6320, CESifo Group Munich.
    17. Stahler Kevin & Subramanian Arvind, 2014. "Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework," Journal of Globalization and Development, De Gruyter, vol. 5(2), pages 129-176, December.
    18. Hassan, Fadi, 2016. "The price of development: The Penn–Balassa–Samuelson effect revisited," Journal of International Economics, Elsevier, vol. 102(C), pages 291-309.
    19. Epstein, Hernán & Marconi, Salvador, 2016. "Purchasing power parities for Latin America and the Caribbean, 2005-2013: methods and results," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    20. A.B. Atkinson & Anne-Catherine Guio & Eric Marlier, 2015. "Monitoring the evolution of income poverty and real incomes over time," CASE Papers /188, Centre for Analysis of Social Exclusion, LSE.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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