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Trying to Understand the PPPs in ICP2011: 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, and in some cases, to allocate resources. 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. The world according to ICP 2011 looks markedly more equal than calculated from 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 US by between 18 to 26 percent.

Suggested Citation

  • Angus Deaton & Bettina Aten, 2014. "Trying to Understand the PPPs in ICP2011: Why are the Results so Different?," NBER Working Papers 20244, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20244
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    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
    2. 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.
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    1. A propos des nouvelles estimations de PPA
      by ? in D'un champ l'autre on 2014-06-28 04:20:00

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    Cited by:

    1. Oulton, Nicholas, 2018. "GDP and the system of national accounts: past, present and future," LSE Research Online Documents on Economics 87178, London School of Economics and Political Science, LSE Library.
    2. 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.
    3. Ali Hosseiny, 2015. "Violation of Invariance of Measurement for GDP Growth Rate and its Consequences," Papers 1507.04848, arXiv.org, revised Aug 2016.
    4. 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.
    5. 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.
    6. Oulton, Nicholas, 2015. "Space-time (In)consistency in the national accounts: causes and cures," LSE Research Online Documents on Economics 86285, London School of Economics and Political Science, LSE Library.
    7. 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.
    8. Westmore, Ben, 2018. "Do government transfers reduce poverty in China? Micro evidence from five regions," China Economic Review, Elsevier, vol. 51(C), pages 59-69.
    9. Jolliffe,Dean Mitchell & Prydz,Espen Beer, 2015. "Global poverty goals and prices : how purchasing power parity matters," Policy Research Working Paper Series 7256, The World Bank.
    10. 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.
    11. 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.
    12. 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.
    13. Anand, Sudhir & Segal, Paul, 2017. "Who are the global top 1%?," LSE Research Online Documents on Economics 101816, London School of Economics and Political Science, LSE Library.
    14. 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.
    15. Caroline Dotter, 2017. "Can the World Bank's International Poverty Line reflect extreme poverty?," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 232, Courant Research Centre PEG.
    16. 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.
    17. Anand, Sudhir & Segal, Paul, 2017. "Who Are the Global Top 1%?," World Development, Elsevier, vol. 95(C), pages 111-126.
    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. 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.
    20. repec:eee:wdevel:v:105:y:2018:i:c:p:201-216 is not listed on IDEAS
    21. 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.
    22. 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:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • F00 - International Economics - - General - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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