The Empirical Welfare Content of International Price and Income Comparisons

Hubert Wu

Papers from arXiv.org

Abstract: Multilateral index numbers, such as those used to make cross-country comparisons of prices and income, are fundamental objects in economics. However, these numbers can be challenging to interpret in terms of welfare due to a bias related to preference misspecification. To study this problem, I derive multilateral bounds on the cost of living implied by revealed preference. The bounds improve upon their classical bilateral counterparts, permit a benchmark-free appraisal of comparison methods, and define a novel index that is transitive, welfare-consistent, and which incorporates income effects. In an appraisal application I find support for the welfare-interpretability of many contemporary index methods, but not for market exchange rates. Turning to the end uses of cross-country comparisons themselves, I document that when calculated using an index based on the multilateral cost of living, the world in 2017 was substantially larger and more equal vis-\`a-vis the United States than suggested by conventional measures.

Date: 2025-04, Revised 2025-08
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