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International relative price levels: a look under the hood

  • Jaime Marquez
  • Charles Thomas
  • Corinne Land
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    This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank’s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1055/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2012/1055/ifdp1055.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1055.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgif:1055
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    Web page: http://www.federalreserve.gov/

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    1. Alan M. Taylor & Paul Bergin & Reuven Glick, 2005. "Productivity, Tradability, and the Long-Run Price Puzzle," Working Papers 511, University of California, Davis, Department of Economics.
    2. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
    3. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc.
    4. Irving B. Kravis & Robert E. Lipsey, 1990. "The International Comparison Program: Current Status and Problems," NBER Working Papers 3304, National Bureau of Economic Research, Inc.
    5. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 327-68, May.
    6. Robert E. Lipsey & Linda Molinari & Irving B. Kravis, 1991. "Measures of Prices and Price Competitiveness in International Trade in Manufactured Goods," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 144-199 National Bureau of Economic Research, Inc.
    7. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
    8. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
    9. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099, March.
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