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Axiomatic and Economic Approaches to International Comparisons

  • W. Erwin Diewert

The paper considers the problem of choosing a multilateral system of index numbers in order to make aggregate price and quantity comparisons between many countries and regions. The problems involved in choosing functional forms in order to make these comparisons are both theoretically and empirically more difficult than the problems involved in choosing a bilateral index number formula. The great variation in relative prices and quantities in the international context means that the choice of a multilateral method is empirically important: different methods will give very different answers. The paper reviews ten classes of multilateral methods both from the viewpoint of the axiomatic approach as well as the economic approach. A new system of 11 desirable axioms or properties for multilateral systems is suggested. With respect to the economic approach, the concept of a superlative bilateral index number formula (which can adequately model substitution effects) is adapted to the multilateral context. Each of the 10 classes of multilateral methods is evaluated from the axiomatic and economic perspectives. Four classes of methods are identified as being `best' They are all superlative and satisfy slightly different sets of axioms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5559.

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Date of creation: May 1996
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Publication status: published as Axiomatic and Economic Approaches to International Comparisons , W. Erwin Diewert. in International and Interarea Comparisons of Income, Output, and Prices , Heston and Lipsey. 1999
Handle: RePEc:nbr:nberwo:5559
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  1. Gerardi, Dino, 1982. "Selected Problems of the Inter-Country Comparisons on the Basis of the Experience of the EEC," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 28(4), pages 381-405, December.
  2. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  3. Eichhorn, W, 1976. "Fisher's Tests Revisited," Econometrica, Econometric Society, vol. 44(2), pages 247-56, March.
  4. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  5. Marris, Robin, 1984. "Comparing the Incomes of Nations: A Critique of the International Comparison Project," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 40-57, March.
  6. Kravis, Irving B, 1984. "Comparative Studies of National Incomes and Prices," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 1-39, March.
  7. Diewert, W E, 1974. "Functional Forms for Revenue and Factor Requirements Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 119-30, February.
  8. Drechsler, Laszlo, 1973. "Weighting of Index Numbers in Multilateral International Comparisons," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 19(1), pages 17-34, March.
  9. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-28, May.
  10. Hill, T P, 1984. "Introduction: The Special Conference on Purchasing Power Parities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(2), pages 125-33, June.
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