An Exploration of the International Comparison Program's New Global Economic Landscape

The Purchasing Power Parity (PPP) rates from the 2011 round of the International Comparison Program (ICP) imply some dramatic revisions to price levels and real incomes across the world. The paper tries to understand these changes. Domestic inflation rates account for a share of the PPP changes, although less so for the 2011 revisions than prior ICP rounds. A marked downward drift in ICP price levels for developing countries also emerged in 2011. Conditional on domestic price changes, the co-movement of PPPs with market exchange rates suggests that that the ICP puts higher weight on more internationally comparable traded-goods than do domestic indices. There is also evidence of a Dynamic Penn Effect, whereby economic growth comes with higher prices. The drift is concentrated in the Asia regional groupings used for ICP implementation. The results are not consistent with expectations based on the only methodological change identified to date although other explanations remain to be investigated.