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)| false Steenge, Albert E.and Erwin Bramer, “International Economic Comparisons Using Seton Eigenprices with Case Studies of Germany, Indonesia, Latvia and the Netherlands,”mimeo, Socio-Economic Data Division, International Economics Department, The World Bank, ( September 1993).
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)| false Velupillai, Kumaraswamyand Stefano Zambelli, “The Economics of Production-Based Indicators and the Purchasing Power of Currencies For International Economic Comparisons,”mimeo, Socio-Economic Data Division, International Economics Department, The World Bank, ( August 1993).
I wish to thank Sultan Ahmad, James Blalock, Jitendra Borpujari, David Coe, Yuri Dikhanov, Orlando Roncesvalles, and George Tavlas for their helpful comments and suggestions. I would also like to thank Costas Christou for providing some of the calculations used in this paper. Of course, all opinions and any remaining errors are solely my responsibility.
In addition to its regular facilities, the Fund has also generated resources to provide assistance to low-income developing countries on concessional terms. Such assistance has been provided through the Trust Fund, the Structural Adjustment Facility, and, more recently, the ESAF.
One weakness in the formulation of the PPP doctrine is the lack of any description of the dynamics of transition toward this “equilibrium” exchange rate. In addition, Stein (1993) notes that the PPP theory is inadequate for the purpose of even defining an equilibrium exchange rate because of an implicit assumption of stationarity underlying PPP. The assumption that equilibrium real exchange rates are stationary has been empirically refuted for reasonable time spans. In effect, stationarity would imply that any fundamental determinants of the real exchange rate, such as disturbances to productivity or changes in the rate of capital formation, would also have to be stationary. Instead, Stein develops an economic generalization of PPP which is a moving equilibrium rate determined via endogenous changes in capital and debt.
However, there is also a body of empirical evidence suggesting that market exchange rates, in the long run, tend toward PPP levels. See, for example, MacDonald (1993).
For example, Kleiman (1993) empirically examines the role of taxes in explaining deviations from PPP and concludes that domestic indirect taxes significantly influence cross-country price levels.
Balassa (1964) provides some empirical evidence of international differences in productivity between the tradables and nontradables sectors. Relatively high productivity in the tradables sector for high-income countries implies, under factor price equalization, that the production of nontradables will be relatively inefficient, while the reverse is true for lower-income countries.
Bhagwati (1984) notes that the production of nontradables is relatively labor-intensive, so that the prices of nontradables tend to be relatively low in labor-abundant (usually low-income) countries. The reverse is true for relatively capital-abundant (usually higher-income) countries.
In real terms, the growth rates between 1985-90 for the industrial countries and for the major oil-exporting countries were 3.2 percent and 2.5 percent, respectively, compared with a growth rate of 4.1 percent for the non-oil developing countries. However, in nominal terms, the respective growth rates were 6.9 percent, 3.1 percent, and 2.1 percent for the industrial countries, the major oil-exporting countries, and the non-oil developing countries. Thus, over the 1985-90 period, the nominal exchange rate movements have not reflected differentials in domestic and external inflation rates and have, therefore, resulted in significant changes in real exchange rates.
Some authors have used the abbreviation, PPC, for Purchasing Power of Currencies to explicitly distinguish this approach from the PPP theory.
The European Community is now called the European Union, or EU.
In 1993, the UN Statistical Commission formally endorsed a move to include the ICP price surveys as part of regular national price data collection.
These countries account for more than one-half of non-OECD GDP.
However, China’s participation in the 1993 survey was on a very limited basis.
Much of the survey work for this survey will be conducted throughout 1994, but 1993 will serve as the base year.
The term, “region,” is used here to denote a grouping of countries which is not necessarily geographic, but may be organizational in nature (for example, the OECD).
However, when one country belongs to more than one region, its ranking relative to other countries may differ within the regions, so that for global comparisons, a dominant region is chosen for the fixity property.
Final product prices, which include taxes and subsidies, are used.
The 150 basic headings are comprised of approximately 110 consumption, 35 investment, and five government categories.
A functional approach for making comparisons would be based on a
theoretical structure with economic underpinnings, whereas a statistical
approach emphasizes the index construction and its associated statistical properties.
The international dollar is defined to have the same purchasing power as the U.S. dollar over total U.S. GDP, but its purchasing power is determined by average international prices rather than U.S. prices.
See Table 30 and its associated technical notes in the World Development Report 1992 and 1993 for a fuller discussion of the methodology.
The Atlas method attempts to smooth fluctuations in exchange rates and per capita GNP estimates by using a three-year average for the official or market exchange rates which are used to convert the GNP figures to U.S. dollars.
See Summers and Heston (1991) for a detailed description of the Penn World Table Mark 5. For practical reasons, the Fund adopted the PPP estimates of the Penn World Table, rather than those used by the Bank, because the Penn World Table provides time series while the Bank does not.
See United Nations, Economic Commission for Europe (1980) for a description of the Physical Indicators Global method.
See Guide and Schulze-Ghattas (1992) for more information regarding the Fund’s bridging equations.
Empirical studies have indicated that price levels (adjusted to a common numeraire) in Africa are higher, on average, than in other developing countries. This leads to a smaller divergence between the PPP-based and exchange rate-based estimates for Africa as compared to other developing countries. It is also possible that the dummy variable is capturing the effect of relatively overvalued exchange rates in Africa (particularly for the CFA countries prior to the January 1994 devaluation) compared with other regions.
For comparison, the estimate for China’s GDP, converted at the official exchange rate, is only $379 billion. See Guide and Schulze-Ghattas (1993), Box 1. GDP Estimates for China.
The weights are the shares of total world GDP for each of the listed categories, where “world” GDP is the total GDP for the 104 countries in the Bank database for PPP-adjusted GDPs.
The Fund’s PPP weights place China in third place. This ranking does not include the FSU since the 1990 Bank database for PPPs does not have data on the FSU. The difference in the rankings between Table 2 and those given here reflect the differences in the underlying databases for GDP.
With respect to the WEO aggregations, the Fund staff has not published the underlying PPP-based GDP data for individual countries, with the exception of the G-7, and a full comparison of the WEO PPP-based shares and rankings with the Bank’s PPP data is not provided in Table 2. It is understood, however, that many of the estimates used in the WEO PPP data are largely derived from published original source data.
For example, extrapolations do not take account of changes in the terms of trade.
See Ahmad (1993). However, another source of intertemporal inconsistency arises from inconsistencies over time in the ICP basic categories.
Such regressions postulate a relationship between prices of varieties of heterogeneous goods and the quantities of characteristics contained in them. In this manner, the quantities of characteristics are used as a measure of the quality of the good, so that differences in prices are associated with variations in quality.
This is the terminology used by the ICP to indicate the difficulty in determining the proper international pricing of services.
The increasing share of services in global GDP as countries mature will pose further difficulties for PPP-based comparisons.
Lancieri (1990) discusses in more detail the potential for bias and distortion as a result of the non-inclusion of the price of capital in the construction of PPP indices.
It has been argued that market exchange rate-based GDP captures much of a country’s relative financial importance since market exchange rates can be strongly influenced by capital flows. In addition, capital account variables are indirectly reflected in the quota formulas via changes in reserves.
Transitivity refers to the property that direct bilateral comparisons between two countries should yield the same result as indirect comparisons between the same two countries, using a third country as an intermediate between the first two.
Also referred to as matrix consistency, this property implies that estimates of subaggregates of GDP (within a country) should add up to total GDP, and consistent comparisons can also be made across countries (within a subaggregate).
This property, similar to the property of representativeness discussed in the previous section, implies that the quantity weights used in the PPP index should accurately reflect the consumption patterns for the countries under consideration.
The GK version of PPP estimation developed by Kravis, Heston, and Summers (1982) employs “super-country weights” to deal with the problem of incomplete coverage (for example, if country A participated in the ICP exercise, but country B did not, country A’s price and quantity structures could be treated as representative of those in country B, if both countries come from the same income group). While this approach softens the Gerschenkron effect (since it shifts the “average” country more toward the developing countries, which are underrepresented among the ICP participants), it depends on a rather strong assumption of structural similarity within respective income groups and introduces a degree of arbitrariness and inaccuracy that is difficult to measure.
Since the EKS method does not suffer from the Gerschenkron effect, it was felt that this method would provide more accurate bilateral comparisons.
Regional fixity also implies that additivity is not necessarily satisfied in the global comparisons, although additivity continues to exist within regions.
This issue is somewhat related to the time series concept of spurious regressions, in which a common trend, rather than a true economic relationship, can produce very high R-squared values without any real explanatory power.
Of course, a high R-squared is not indicative of a regression’s ability to forecast out-of-sample.
See Ahmad (1992) and Guide and Schulze-Ghattas (1992) for more detailed descriptions of the bridging equations, associated R-squared values, and out-of-sample prediction properties.
Note that assigning equal weights to all countries implies that a country which rarely consumes a given commodity will have as great an impact on the international price as a country for which the commodity comprises a significant portion of consumption.
For example, the problem of double deflation often plagues traditional production-side estimation. To estimate value added at constant prices requires that both output and intermediate inputs be valued at constant prices, so that value added is affected by errors of measurement in two series.
Indeed, no single aggregation procedure or methodology will satisfy all the criteria that have generally been proposed. A choice would need to be made among the alternatives to meet the requirements of specific users.
For example, the contribution of the GDP variable in the calculated quotas for the Ninth Review was approximately 36 percent.
Of course, it could be argued that market or official exchange rate conversion factors also suffer from lack of uniformity and consistency in their quality. However, in contrast to the situation with PPP conversion factors, “market” exchange rates “exist” for all countries and do not have to be artificially constructed based on simple, but often inaccurate, comparisons with other countries (as must be done to obtain PPP conversion factors for many of the developing countries which have not participated in the PPP exercises).
The results for the quota calculations are based on data through 1990 and the PPP database used by the Fund for WEO weights.
These members currently comprise 64.5 percent of the present quota shares.
Of course, if PPP-based estimates of per capita income were to be employed, the cut-off for eligibility would also be reconsidered. Nevertheless, substantial shifts in eligibility can be expected to occur with the switch to PPP conversion rates for those countries in the region of the cut-off per capita income figure.
In the World Bank’s World Development Report 1993, regression estimates as well as actual ICP survey-based estimates of PPP-adjusted GDPs per capita are provided for comparison purposes. For example, in Ethiopia, actual survey results imply a per capita income of 370 international dollars, while regression results indicate an income of 620 international dollars.
Conducting the extensive ICP surveys needed for accurate estimates of PPPs could entail considerable technical and financial support for some of the developing countries. The required resources for full implementation may not be available.
UN and EUROSTAT (1986-1987).