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

Angus Deaton, Bettina Aten

NBER Working Paper No. 20244
Issued in June 2014
NBER Program(s):   DEV   EFG   IFM

The 2011 round of the International Comparison Program (ICP) has published a set of purchasing power parities (PPPs) that are sharply different from those that were expected from extrapolation of the 2005 round. In particular, the world in 2011 looks sharply more equal than previously calculated, because consumption and GDP in most poor countries were revised upward relative to the U.S. and other rich countries. Here we attempt to find out what happened. It is first noted that the 2005 round was itself sharply different from what was then expected, and made the world much less equal. We argue that the 2011 round is superior to the 2005 round, and that many of the changes in 2011 undo what happened in 2005. We identify a likely source of the problem, which is 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 by between 20 to 30 percent. If these results are correct, they call for substantive backward revision of international comparisons, as well as estimates of global poverty and inequality.

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Document Object Identifier (DOI): 10.3386/w20244

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