Trying to Understand the PPPs in ICP2011: Why are the Results so Different?

Angus Deaton and Bettina Aten

No 20244, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E01 F00 O11 O47 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-ltv, nep-opm and nep-sea
Note: DEV EFG IFM
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Citations: View citations in EconPapers (40)

Published as Angus Deaton & Bettina Aten, 2017. "Trying to Understand the PPPs in ICP 2011: Why Are the Results So Different?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 243-264, January.

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Journal Article: Trying to Understand the PPPs in ICP 2011: Why Are the Results So Different? (2017)
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