Spatial Chaining in International Comparisons of Prices and Real Incomes

Gholamreza Hajargasht (), Robert Hill (), D.S. Prasada Rao () and Sriram Shankar

No 2018-03, Graz Economics Papers from University of Graz, Department of Economics

Abstract: Multilateral international comparisons of the purchasing power of currencies and real income often use as building blocks bilateral comparisons between all possible pairs of countries. The standard approach in the literature weights all these bilaterals equally. One problem with this approach is that some bilaterals are typically of lower quality, and their inclusion therefore can undermine the integrity of the multilateral comparison. Formulating multilateral comparisons as a graph theory problem, we show how quality can be improved by replacing bilateral comparisons with their shortest path spatially chained equivalents. We consider a few variants on this approach, and illustrate these multilateral methods using data from the 2011 round of the International Comparisons Program (ICP). Using some novel bounds criteria, we demonstrate how spatial chaining improves the quality of the overall multilateral comparison.

Keywords: International Comparisons Program (ICP); Price Index; Spatial Chaining; Weighted GEKS; Shortest Path; Spanning tree; Country-Product-Dummy(CPD) Method, Afriat bounds (search for similar items in EconPapers)
JEL-codes: C43 E31 O47 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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