True Measures of GDP and Convergence

Steve Dowrick and John Quiggin

American Economic Review, 1997, vol. 87, issue 1, 41-64

Abstract: Widely used 'purchasing power parity' comparisons of per capital GDP are not true quantity indexes and are subject to systematic substitution bias. This bias may distort measurement of convergence and divergence. Extending Hal R. Varian's nonparametric construction of a true index gives the set of true indexes, including the new Ideal Afriat Index. These indexes are utility-consistent and independent of arbitrary reference price vectors. The authors establish bounds on the dispersion of true multilateral indexes, hence bounds on convergence. International price indexes understate both true GDP dispersion and, where prices are converging over time, the rate of time quantity convergence. Copyright 1997 by American Economic Association.

Date: 1997
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