Working Paper: NBER ID: w20244
Authors: Angus Deaton; Bettina Aten
Abstract: Purchasing power parity exchange rates, or PPPs, are price indexes that summarize prices in each country relative to a numeraire country, typically the United States. These numbers are used to compare living standards across countries, by academics in studies of economic growth, particularly through the Penn World Table, and in some cases, to allocate resources. The International Comparison Program (ICP) collects the detailed prices on which these indexes are based on an irregular basis. In 2014, the ICP published PPPs from the 2011 round that are sharply different from those that were expected from extrapolation of the previous round, ICP 2005. These discrepancies will eventually have important implications for the Penn World Table, and for international comparisons of living standards. The world according to ICP 2011 looks markedly more equal than calculated from ICP 2005. This paper investigates why this happened. We identify a likely source of the problem in the way that the regions of the ICP were linked in 2005. We use two different methods for measuring the size of the effect. Both suggest that the 2005 PPPs for consumption for countries in Asia (excluding Japan), Western Asia, and Africa were overstated relative to the US by between 18 to 26 percent.
Keywords: Purchasing Power Parity; International Comparison Program; Living Standards; Economic Growth
JEL Codes: E01; F00; O11; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ring linking method used in 2005 (C59) | overstatement of 2005 PPPs for consumption in certain regions (F62) |
| changes in the linking methodology from 2005 to 2011 (C80) | observed differences in PPPs (F29) |
| 2011 ICP round correcting overpricing observed in 2005 (L11) | more accurate representation of price levels across regions (E30) |
| overpricing of PPPs in poorer countries (P22) | systematic overestimation of consumption PPPs (F31) |