On the Reliability of Unit Value Ratios in International Comparisons

Marcel Timmer

No 199631, GGDC Research Memorandum from Groningen Growth and Development Centre, University of Groningen

Abstract: In this paper reliability indicators are developed for the Laspeyres and Paasche index type currency conversion factors used in the industry of origin approach to international comparisons of output. Given the fact that these conversion factors are calculated on basis of a sampling technique, sampling theory is used to develop formulae for standard errors. A comparison with the stochastic approach to index numbers is made. Empirical evidence for five bilateral comparisons in manufacturing shows that reliability differs as both sample coverage and the degree of price variability play a role. Ninety percent confidence intervals for the total manufacturing Laspeyres and Paasche unit value ratios ranged from ± 4% to ± 11% for the comparisons involving high productivity countries only, and up to ± 27% in a comparison of a low and a high productivity country. At branch level the differences are even more pronounced but no particularly (un)reliable branches could be discerned. Another issue addressed in this paper is whether products should be grouped together before estimation of the indices. Stratified sampling theory suggests that if the grouping is carried out properly, more precise estimates can be obtained. Guidelines for this intermediate grouping are given. Empirical evidence suggests that the grouping of products into four digit ISIC industries improves the estimation of the aggregate indices.

Date: 1996
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