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Rationalising the Penn World Table: True Multilateral Indices for International Comparisons of Real Income

  • J. Peter Neary

Real incomes are routinely compared internationally using methods which 'correct' for deviations from purchasing power parity. The most widely used of these is the Geary method which, though theoretically suspect, underlies the Penn World Table. This paper provides a theoretical foundation for the Geary method which I call the GAIA ('Geary-Allen International Accounts') System. I show that the Geary method is exact when preferences are non-homothetic Leontief and, more generally, gives a (possibly poor) approximation to the GAIA benchmark. An empirical application suggests that both it and other widely-used methods underestimate the degree of international inequality.

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File URL: http://hdl.handle.net/10197/6368
File Function: First version, 2004
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Paper provided by School of Economics, University College Dublin in its series Working Papers with number 199622.

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Length: 41 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:ucn:wpaper:199622
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  1. 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.
  2. Hill, Robert J, 1997. "A Taxonomy of Multilateral Methods for Making International Comparisons of Prices and Quantities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 43(1), pages 49-69, March.
  3. Richard Blundell & Martin Browning & Ian Crawford, 2002. "Nonparametric Engel Curves and Revealed Preference," CAM Working Papers 2002-04, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  4. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  5. Nuxoll, Daniel A, 1994. "Differences in Relative Prices and International Differences in Growth Rates," American Economic Review, American Economic Association, vol. 84(5), pages 1423-36, December.
  6. Neary, J-P & Gleeson, B, 1997. "Comparing the Wealth of Nations : Reference Prices and Multilateral Real Income Indexes," Papers 97/19, College Dublin, Department of Political Economy-.
  7. Diewert, W. E. & Wales, T. J., 1988. "A normalized quadratic semiflexible functional form," Journal of Econometrics, Elsevier, vol. 37(3), pages 327-342, March.
  8. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-93, September.
  9. John Muellbauer, 1975. "Aggregation, Income Distribution and Consumer Demand," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 525-543.
  10. J. Peter Neary, 1996. "Theoretical foundations of the "Geary method" for international comparisons of purchasing power and real incomes," Working Papers 199603, School of Economics, University College Dublin.
  11. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  12. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March.
  13. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  14. Heston, Alan & Summers, Robert, 1996. "International Price and Quantity Comparisons: Potentials and Pitfalls," American Economic Review, American Economic Association, vol. 86(2), pages 20-24, May.
  15. Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
  16. Dowrick, Steve & Dunlop, Yvonne & Quiggin, John, 2003. "Social indicators and comparisons of living standards," Journal of Development Economics, Elsevier, vol. 70(2), pages 501-529, April.
  17. Dowrick, Steve & Quiggin, John, 1997. "True Measures of GDP and Convergence," American Economic Review, American Economic Association, vol. 87(1), pages 41-64, March.
  18. Xavier X. Sala-i-Martin, 1997. "I Just Ran Four Million Regressions," NBER Working Papers 6252, National Bureau of Economic Research, Inc.
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