Working Paper: CEPR ID: DP1865
Authors: Patrick Honohan
Abstract: Conventional PPP-adjusted real output measures, invaluable for making international comparisons of living standards, may greatly exaggerate the productive capacity of poor countries. The equilibrium prices of an hypothetical world of full economic integration provide an instructive basis for evaluating the potential share of different countries in world output.
Keywords: purchasing power parity; world distribution of income; developing countries
JEL Codes: F43; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of barriers to international price equalization (F69) | change in production patterns and relative prices (F16) |
| change in production patterns and relative prices (F16) | perceived economic size of poor countries (F63) |
| conventional PPP adjustments (F31) | exaggeration of productive capacity of poor countries (O57) |
| removal of barriers to international price equalization (F69) | smaller relative size of poor countries compared to unadjusted GNP ratios (F63) |
| shrinkage of relative output gaps (F62) | misrepresentation of actual productivity differences (D29) |
| evaluating outputs at hypothetical equilibrium prices (D41) | reveal greater disparity in productivity than PPP adjustments imply (O49) |
| apparent convergence in per capita output figures (O47) | obscuring of underlying productivity gaps (O49) |