A conceptual note on the aggregation of international prices using index numbers
Aggregation of international prices in empirical work is generally based on well known index number formulas. However, a common practice applying such formulas is the use of price indices rather than price levels for which data across countries are rarely available. Numerical calculations of price aggregates are therefore typically not able to fully capture the increasingly important role that low-cost countries play in determining international prices. When only price indices for a tradable group of interest are available the question arises of how to approximate relative price levels across countries to accommodate inflationary impulses and price level differences in a final index number. In the present note, we address this question from both a theoretical and an empirical perspective. We propose a conceptual framework for analysing sources of change in international prices using the Törnqvist price index as the underlying index number formula. Herein, we suggest a calibration method based on purchasing power parities to make a relative price index interpretable as a relative price level. We present an illustrative numerical example based on data from the industry of textiles and wearing apparel. Our findings show that the impact of price level differences (the so-called China effect) is substantial in the computed aggregate of international prices.
|Date of creation:||Jun 2011|
|Contact details of provider:|| Postal: P.O.Box 8131 Dep, N-0033 Oslo, Norway|
Phone: (+47) 21 09 00 00
Fax: +47 - 62 88 55 95
Web page: http://www.ssb.no/en/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ssb:dispap:656. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (L MaasÃ¸)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.