Intertemporal and interspatial comparisons of income : the meaning of relative prices

The conceptual issues confronting compilers of price indices have not changed much over the years. They include the intractability of basic index-number problems, the practical difficulties of sampling and matching prices, and the uncertainties about the appropriate weighting scheme for comparing events in specific locales over time and across locales. The author considers inconsistencies in some measures of time-to-time and place-to-place comparisons of income. He argues for a method that harmonizes price work across generally recognized national price compilations, such as consumer price indices (CPSs), the International Comparison Programme (ICP), and national accounting. Modern economies tend to be more open, so relative prices should be more similar, but it is increasingly apparent that price levels and trends can differ considerably even within a nation - particularly those encompassing economically heterogeneous areas. The global ICP exercise has provided useful insights into the issues involved. At the same time, international comparisons of the type ICP aims to facilitate are now seen as being more sensitive than expected to changes in relative prices. ICP has given little attention to this issue, but there is a rich literature on the subject with respect to CPS. The common ground for the two logics is essentially national accounts, broadly defined. Through conceptual and practical work done by the World Bank on the topic, the author suggests that harmonizing the various methods is essential to a proper interpretation of the market signals that prices send to economic agents. He also explains how a better synthesis reduces the overall cost of collecting relevant information and disseminating it to users.