Understanding Ppps and Ppp-Based National Accounts

By Angus Deaton, Alan Heston. 2010

429 citations recorded by the source corpus.

PPP-based national accounts have become an important part of the database for macroeconomists, development economists, and economic historians. Frequently used global data come from the Penn World Table (PWT) and the World Bank's World Development Indicators; a substantial fraction of the world is also covered in the PPP accounts produced by the OECD and the European Union. This paper provides an overview of how these data are constructed, and discusses both the theory and the practical problems of implementing it. All of these data are underpinned by the International Comparison Program (ICP), which collects data on prices worldwide. The most recent round of the ICP was for 2005 with final results published in early 2008; version 7.0 of the Penn World Table will soon incorporate these results. The 2005 ICP, like earlier rounds, involved substantial revisions to previous data, most notably revising downwards the size of the Chinese (40 percent smaller) and Indian (36 percent) economies. We discuss the reasons for the revisions, and assess their plausibility. We focus on four important areas: how to handle international differences in quality, the treatment of urban and rural areas of large countries such as China, India, and Brazil, how to estimate prices for government services, health, and education, and the effects of the regional structure of the ICP. All of these affect the interpretation of previous data, as well as the current revisions. We discuss previous revisions of the PWT, and their effects on various kinds of econometric analysis. The paper concludes with health warnings that should be kept in mind when using these data, which are not always suitable for the purposes to which they are put. Some international comparisons are close to impossible, even in theory, and in others, the practical difficulties make comparison exceedingly hazardous.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/c69d4ac3a226dde0b66adec5c9a6030f16c805c6

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Finance

Citations in the corpus

Real Exchange Rate Misalignments in the Euro Area (2020, neutral): “Moreover, PPPs suffer from large measurement issues, such as the aggregation bias of items’ prices, items’ representativity, quality matching (ICP, 2007; Deaton and Heston, 2010). This confirms the usefulness of comparing results based on all five available deflators in our analysis. Whereas it is n”
The developing world is poorer than we thought, but no less successful in the fight against poverty (2008, neutral): “8 Broader discussions on PPP methodology can be found in Ackland et al. (2006), World Bank (2008a) and Deaton and Heston (2009).”
The Global Distribution of Income (2014, methodology): “…rate for a country is simply the geometric mean of that country’s Fisher price indices relative to every other country and, as already mentioned, has a natural statistical interpretation that is attractive to national income accountants if not to consumer theorists (Deaton and Heston, 2010).”
What Remains of Cross-Country Convergence? (2018, background): “The massive undertaking of price collection, known as the International Comparison Programme/Project (ICP) is at the heart of PWT—see Deaton and Heston (2010) and Johnson et al. (2013) for detailed discussions on methodological challenges facing PWT.”
Where Do The Poor Live (2012, background): “Deaton and Heston (2010) note four issues relating to the construction of PPPs: how to handle international differences in quality; the treatment of urban and rural areas of large countries; how to estimate prices for “comparison resistant items” (e.g., government services, health and education);…”
Global inequality recalculated and updated: the effect of new PPP estimates on global inequality and 2005 estimates (2012, background): “This would be an obvious and rather odd comment to make were it not for the fact that higher price level and thus lower real income for China has attracted particular attention and been subject of dispute [11, 12, 22, 32].”
Rebasing 'Maddison' : new income comparisons and the shape of long-run economic development (2018, background): “These considerations call for a degree of modesty about the precision of any given real GDP per capita number; see also the discussion of Deaton and Heston (2010) on uncertainties surrounding relative price (and thus relative income) measurement.”