Parallel session IARIW 2014

1. Discussion by Erwin Diewert of:
“Penn World Tables 8.0: A User Guide”
Robert C. Feenstra (University of California and NBER)
Robert Inklaar (University of Groningen)
Marcel Timmer (University of Groningen)
33rd IARIW General Conference,
August 24-30, 2014,
Rotterdam, The Netherlands
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2. Overview
 The main purpose of the paper is to provide readers of a
non-technical overview of the latest version of the Penn
World Tables: PWT: Version 8.
 What are the new concepts?
 How was the data set constructed (roughly)?
 Which version of the Tables should be used in various
specific research contexts?
 What are the limitations of the measures?
 This is a very exciting paper! I think that the authors do an
excellent job of answering the above questions!
 75000 visitors to the website since its launch in July 2013!
 75 citations to the main paper since the launch! Definitely a
best selling paper!
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3. Three Major Changes to the PWT
• For their output oriented measures of real GDP RGDPo that
are comparable across countries, they introduce PPPs for
exports and imports. This measure of real GDP is useful for
comparing productivity levels across countries.
• PWT:8 now interpolates real GDP levels between
benchmark PPP data instead of using the most recent PPP
data to determine relative GDP levels across countries and
then using national growth rates of real GDP to extrapolate
backwards into the indefinite past.
• PWT:8 also provides some measures of country capital
stocks (in comparable units across countries) and labour
input by country so that the Penn World Tables can provide
measures of country productivity levels across countries.
• All of these innovations are very useful.
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4. The China-US Comparison 2005
China United States China/US
A: GDP per capita
in national currency 14565 42330
in US dollars, converted with exchange rate 1777 42330 4%
in US dollars, GDPe 5342 43209 12%
in US dollars, GDPo 5270 42330 12%
B: productivity
GDPo per worker (US$) 8967 87691 10%
Tangible capital stock per worker (US$) 29245 262546 11%
Human capital per worker (index) 2.33 3.64 64%
Total factor productivity (index) 0.29 1.00 29%
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5. Discussion of Expenditure Side Real GDP, RGDPe (1)
 RGDPe is basically a variant of the World Bank’s ICP
estimates of Real GDP by country, that compares real
C+I+G across countries in comparable units and adds the
countries trade balance deflated by its exchange rate with a
numeraire country to form expenditure side real GDP.
 The resulting real GDP estimates are divided by the
country’s population and the resulting real per capita GDP
levels are (approximately) comparable across countries and
give some indication of relative living standards across
countries.
 Historically, the Penn World Tables have used the latest
available World Bank ICP GDP relative levels (the last two
being 2005 and 2011) and then national real GDP growth
rates are used to extrapolate the latest (comparable across
space) ICP real GDP levels back through time.
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6. Discussion of Expenditure Side Real GDP, RGDPe (2)
 PWT:8 makes use of all available World Bank PPP exercises
(1970, 1975, 1980, 1985, 1996, 2005) as well as OECD annual
benchmark estimates of member country relative real GDP
levels and interpolates between successive benchmark
estimates instead of just using one benchmark and
extrapolating backwards forever using national real GDP
growth rates.
 I believe that this change in methodology is a huge
improvement over the earlier Penn Tables. The problem was
that each new benchmark radically changed relative GDP
levels backwards for 40 years or so. The new methodology
will change relative GDP levels but only between successive
benchmark years. [Unless there are historical GDP revisions,
in which case there will be further changes].
 Basic inputs into the construction of the tables: PPPs for
benchmark years, nominal and real national GDP series. 6

7. Discussion of Expenditure Side Real GDP, RGDPe (3)
 Feenstra, Inklaar and Timmer (FIT) made a few
adjustments to PWT:7 and World Bank ICP methodology:
 (1) Instead of using the PWT:7 method or the World Bank
method for aggregating C+G+I (basically the GEKS method
for making international comparisons with some bells and
whistles to account for the problems of maintaining within
region parities), PWT:8 used the GEKS method to aggregate
C+G and then used the Geary-Khamis method to aggregate
C+G with I. Typically this will not make much difference.
 (2) FIT made consistent productivity adjustments for the
Health, Education and General Government sectors (the
World Bank made some adjustments for some regions but
not for others—had to respect regional preferences).
 (3) Following Deaton and Heston (2013), Chinese
consumption prices for 2005 were adjusted down by 20%.
 The following chart compares WB and FIT parities for 2005.
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8. Discussion of Expenditure Side Real GDP, RGDPe (4)
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9. The Index Number Formula and PPP Reliability (1)
 FIT note that (following Deaton and Heston 2010) it is hard
to compare wildly different countries.
 Why? Because they can be consuming totally different goods
and services. How can we compare the incomparable?
 Thus price comparisons over time (within a country) are
likely to be much more accurate than price comparisons
over space (PPP comparisons). Thus the relative real GDP
estimates generated by PPPs are not as reliable as the time
series estimates.
 Even with perfectly accurate PPPs at the basic heading level,
there will be problems in comparing real GDP over space
due to big differences in relative prices across countries;
superlative indexes will no longer closely approximate each
other. And non-superlative multilateral indexes (like GK)
will be even more different than multilateral indexes base on
bilateral superlative indexes (like GEKS).
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10. The Index Number Formula and PPP Reliability (2)
 Thus FIT note that the differences between the GK and
GEKS PPP for a single country can easily be as big as 50%
and thus they note that “due care is needed when comparing
living standards between rich and poor countries”.
 A problem with the GEKS multilateral method is that it may
be too democratic; i.e., every country plays a role as a
numeraire country, where its price (or quantity) structure is
compared in a bilateral fashion with the prices (or
quantities) of every other country in the comparison. Once
all of these “star” parities have been constructed, GEKS
simply takes the equally weighted geometric mean of these
star parities as the final parities.
 I think that a better way of linking countries is by spatial
linking or similarity linking; see the many papers by Robert
Hill but in particular his chapter 9 in D.S. Prasada Rao
(2009), Purchasing Power Parities of Currencies (and look at
my Chapter 8 in the book as well!). 10

11. The Problem with an Additive Method (like GK)
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A
B
C
q2
q1

12. The Index Number Formula and PPP Reliability (4)
 FIT also note that it is hard to justify the assumption of
homothetic (and identical) preferences across countries,
which is the usual justification for the use of the Fisher index.
• But Törnqvist-Theil bilateral price and quantity indexes can
be justified for non-homothetic (but identical) preferences
(this was already done in my 1976 Journal of Econometrics
article on superlative indexes) and for non-homothetic and
even non-identical preferences; see Caves, Christensen and
Diewert (1982), Econometrica 50 (1982), pages 1409-1411
and Diewert (2009), “Cost of Living Indexes and Exact Index
Numbers”, Chapter 8 in Quantifying Consumer Preferences,
edited by Daniel Slottje in the Contributions to Economic
Analysis Series, United Kingdom: Emerald Group
Publishing, pp. 207-246.
• We turn now to a discussion of RGDPo
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13. Discussion of Output Side Real GDP, RGDP0 (1)
• The second major change that FIT implemented was to
introduce output oriented measures of Real GDP that could
be compared across time and space, RGDPo .
• Essentially, they constructed PPPs for exports and imports
(using detailed unit value statistics for X and M) which is
appropriate if we want to apply a production theory
framework to model the relative outputs of each economy in
the comparison project.
• Thus this is all good as far as I am concerned!
• These production theory real output measures can be
matched up with the corresponding real input measures for
at least a number of countries (EUKLEMS and World
KLEMS provide suitable estimates for many countries) and
then we can compare productivity levels of countries
compared to a world frontier and study convergence etc. ,13

14. Discussion of Output Side Real GDP, RGDP0 (2)
 On the previous slide, I have already mentioned the third
major innovation that FIT have introduced into the Penn
World Tables; namely information on capital stocks and
labour input for selected countries.
 But the capital stock estimates are incomplete. These
estimates are of stocks and the list of stocks is incomplete.
 In particular, there are no estimates for the stocks of land,
inventories, subsoil natural resources and R&D at present.
 Presumably as more countries develop their balance sheet
estimates, these gaps will be filled in.
 The labour estimates are also a bit crude; no adjustment for
hours worked. But it is a start!
 The following slide shows the output differences for 2005.
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15. Final Expenditure Side vs Output Side Real GDP
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16. Possible Directions for Change (1)
(1) For RGDPe , it seems to me that we should move to net
product from gross product. Nobody can consume
depreciation but net additions to the capital stock are
definitely contributions to welfare. If PWT were to move to
the net framework, it would set a wonderful precedent!
Moreover, net investment is a lot smaller than gross
investment and so it would not matter so much what index
number formula is used to aggregate C+G with I.
(2) For both GDP concepts, I am assuming that the
interpolation method is the same. The authors suggest a
form of linear interpolation between benchmarks. I have
suggested an alternative interpolation scheme to the authors
which I think is “better”; see Diewert (2014), “Alternative
Measures of OECD Output Growth and Inflation” UBC
discussion paper 14-01. Maybe they could consider it.
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17. Possible Directions for Change (2)
For RGDPo , I would like to suggest the following:
• Indirect taxes should be removed from consumption prices
in order to better justify the economic approach to the
output quantity index and to productivity analysis. (This
follows the productivity literature started by Jorgenson and
Griliches, 1968, 1972).
• The authors should consider using the approach outlined by
Caves, Christensen and Diewert EJ (1982) and Diewert and
Morrison EJ (1986), which justifies the use of Törnvist-Theil
indexes in a production theory context.
• Try to fill in some of the gaps in the capital stock estimates.
It should be possible to extend the KLEMS data to include
inventory stocks and for the few countries that have annual
balance sheets, land estimates should be available. Land is a
tremendously important missing input in the KLEMS
framework.
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18. Possible Directions for Change (3)
• As the World KLEMs database improves, the primary input
data base for PWT can also improve. I think that the PWT
should not put out poor quality data on primary inputs. If
they do, people will use it and come up with all sorts of
problematic empirical results. So restrict the primary input
base to countries where you are more comfortable about the
data quality.
• The application of traditional production theory to the
Health, Education and General Government sectors is
problematic. Also, traditional production theory does not
apply to the financial sector (and we do not have a consensus
on how to measure outputs and inputs in this sector).
Perhaps PWT should leave out these problematic sectors
until measurement improves in these hard to measure
sectors. (Advertising, R&D and Business Consulting also
tough).
Conclusion: a great paper and a great leap forward!
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