Parallel session IARIW 2014

1. “Revisions to global income comparisons −
the case of ICP 2011”
Robert Inklaar
Comment
Nicholas Oulton
LSE
33rd General Conference of the IARIW, Rotterdam,
24-30th August 2014

2. THE PROBLEM
• According to the 2011 ICP, the world is both richer and
more equal than we thought on the basis of the 2005
ICP. And (absolute) poverty rates are also lower. The
average country is 25% richer relative to the US.
• This is because the price levels in most African and
Asian countries turned out to be lower in 2011,
according to the 2011 ICP, than we would have
expected based on extrapolating the 2005 price levels
using inflation rates in each country.
• If prices are lower, the standard of living must be
higher (relative to what we would have expected based
on extrapolating from 2005).
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3. THIS PAPER
Is there some way in which the two rounds of the
ICP can be made consistent with each other?
Robert’s solution
Either
Find a better way of extrapolating from 2005 to
2011.
Or
Revise the 2005 PPPs in a plausible way.
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4. The ratio d
For country j in 2011:
 

 
4
2011 2005
2005
j j
2011 2005
Extrapolated PPP
1
Actual PPP
Actual GDP per head
1
Extrapolated
/
Extrapolated 2005 PPP
GDPper head
:
/
j
US US
j
P P
PPP
P
d
P

 


2005
2011
2011
2005

5. Comparing actual with extrapolated PPPs
in 2011
Note: PPPs extrapolated from 2005 to 2011 using relative inflation rates. 142
countries.
5
GDP Consumption
Mean d 0.237 0.254
Root mean squared d 0.336 0.349

6. Reasons for discrepancy (d not equal to 0)
1. Relative inflation rates are not appropriate
for extrapolating PPPs.
2. The 2005 PPPs were flawed.
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7. “Updating by relative inflation rates is not
appropriate”
• Try extrapolating PPPs using the Balassa-Samuelson
relationship.
[B-S: log (PPP/exchange rate) is negatively related to
log(GDP per capita).]
Result: not much reduction in root mean square d.
• Construct extrapolated PPPs using prices at Basic
Heading level, updated by disaggregated consumer
prices, and weighted together using international
weights. This does not reduce root mean square d very
much either.
• Conclusion: reason 1 not very persuasive.
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8. Were the 2005 PPPs systematically flawed?
A possible solution
Following Deaton and Aten (2014), the problem may lie with the “ring”
procedure in 2005. Comparisons within each region may have been
correct but the process of aligning the 18 ring countries with each
other may have gone wrong. The ring process used a separate product
list which may have been unrepresentative in some poorer countries.
Deaton-Aten-Inklaar solution:
• backcast PPPs for all countries from 2011 to 2005 using relative
inflation rates.
• Calculate regional GDP using these backcast PPPs.
• Assume each country has the same share of this new regional GDP
as it did in the old regional GDP which used 2005 PPPs.
• Re-calculate 2005 PPPs using the new GDP estimates. This
preserves the original relative positions within each ICP region.
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9. Comparing actual with extrapolated PPPs
in 2011
Note: PPPs extrapolated from 2005 to 2011 using relative inflation rates. 142
countries.
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GDP Consumption
Baseline
Mean d 0.237 0.254
Root mean squared d 0.336 0.349
Deaton-Aten
adjustment
Mean d -0.108 -0.003
Root mean squared d 0.165 0.132

10. The root mean square d ratio by ICP region: original
and after Deaton-Aten adjustment (GDP)
Note: Number of countries in each ICP region in parentheses. Source: Table7.
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Original Deaton-Aten
Global (142) 0.336 0.165
Africa (43) 0.344 0.206
Asia (23) 0.420 0.184
CIS (10) 0.341 0.134
Eurostat-OECD (45) 0.121 0.121
Latin America (10) 0.192 0.078
Western Asia (11) 0.747 0.123

11. MY COMMENTS
• The Deaton-Aten-Inklaar adjustment improves
consistency between the 2011 and 2005 PPPs.
But, given this is only a 6 year difference, there is
still a worryingly large discrepancy (d) of 17%.
• The reduction in root mean square d is less than
average in Africa (where according to Deaton-
Aten it might be expected to be greatest).
• Very interesting results on an important topic!
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