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

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  • J. Peter Neary

Abstract

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.

Suggested Citation

  • J. Peter Neary, 2004. "Rationalising the Penn World Table: True Multilateral Indices for International Comparisons of Real Income," Working Papers 199622, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:199622
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    File URL: http://hdl.handle.net/10197/6368
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    More about this item

    Keywords

    GAIA (Geary-Allen International Accounts) system; Geary method; Index numbers of prices and real incomes; Penn world table; PPP (Purchasing Power Parity); QUAIDS (Quadratic Almost Ideal Demand System);
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • F0 - International Economics - - General

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