The paper proposes measuring inequality in global production and trade by combining the World Input-Output Database (WIOD) with price data from the International Comparison Program (ICP). This would involve using purchasing power parities (PPPs) instead of exchange rates to analyze international trade flows and balances. Calculating terms of trade and trade balances using PPPs rather than exchange rates can provide a different picture of trade relationships and inequalities between countries. The paper explores these issues and their implications through examples, discussing how PPPs derived through the Geary-Khamis method could be applied to bilateral trade data.

1. 1
Introducing
“Inequality in Global Production
and Trade: A Proposal for
Measurement”
by
Utz-Peter Reich
IARIW 2014, Rotterdam

2. The basic message of this paper
• The author proposes a marriage of WIOD
and ICP; or
• The use of PPPs (instead of XRs) in the
analysis of international trade.
2

3. Contents of the paper (1)
• Introduction of the GK method for
compiling PPPs.
• Scope of GK: Household expenditure.
• Normalization of GK: Total real hh
expenditure (PPP based) = total nominal hh
expenditure (XR based; SDR as numeraire).
3

4. Contents of the paper (2)
• Application to a bilateral trade example:
should terms-of-trade be computed as
(푃푋/푃푀)푋푅 or (푃푋/푃푀)푃푃푃 ?
• Trade balance based on XRs or PPPs →
Different picture; various possible
explanations.
4

5. 5

6. 6
Inequality in Global Production
and Trade: A Proposal for
Measurement
by
Utz-Peter Reich
Mainz University of Applied Sciences (em.),
Germany

7. 7
Three questions (and answers)
1. What is equality in international trade?
2. How may it be defined?
3. Is its observation statistically feasable?
Ad 1: An equilibrium between advantageous and
disadvantageous terms of trade.
Ad 2: Equality of internal and external purchasing power of a
national currency.
Ad 3: Yes, by means of ICP and WIOD.

8. 8
Terms of trade
A country’s terms of international trade are defined as follows:
p
ex
p
im
t.o.t.  e
where pex and pim denote the price indexes of exports and imports,
respectively, and e is the rate at which foreign currency is
exchanged against its domestic counterpart. Terms of trade,
therefore, are governed by two kinds of variables, prices at product
markets, and rates of foreign exchange at financial markets. We
are interested in the latter.

9. 9
Geary-Khamis system
of purchasing power parities
q x i m
j j
j
j i
j
i i    , 1,...,
  
i
j
i i
i
j
j i  x  q , j 1,..., n.
q x / ppp , i 1,..., m; j 1,..., n. j
j
 j
 
i i
i
  j x  x  5,589  billion SDR

i j
j
i
i j
j
i

10. 10
Private Consumption Expenditure 2005
xij (million SDR)
GER JAP UK USA
Food, nonalc. beverages 118 248 84 375
Alcoholic bev., tobacco 37 51 36 110
Clothing and footwear 55 62 55 213
Housing, water, electicity 260 436 192 1045
Furnishing, equipment 71 75 56 280
Health 47 70 15 1050
Transport 152 201 139 625
Communications 31 46 23 122
Recreation and culture 101 191 114 530
Education 9 41 13 111
Restaurants, hotels 58 114 100 346
Miscellaneous 137 257 139 782
Sum 1078 1792 965 5589
j 0,8968 0,8244 0,8577 1,1008

11. 11
Classical model of trade
E D
cloth
A
F
corn
England
Poland
B C

12. 12
PPP in the classical model
1 = 1.262 [ounces of silver / kg corn]
2 = 0.993 [ounces of silver / m cloth]
1 = 0.936 [ounces of silver / shilling]
2 = 1.120 [ounces of silver / zloty]
The parity exchange rate between shilling and sloty is thus given
by 1/ 2 = 0.836 [zloty / shilling].
kg m
p
ex . . .( )   0.836 /
p
t o t at parity
im

13. 13
Trade balances 1995
in nominal and in real terms
(billion $)
Valued at:
DEU FRA JAP USA BRA CHN IND RUS
Market ex-change
rates
-19.4 -19.1 40.1 -75.7 -2.7 71.3 -2.0 7.5
Purchasing
power
parities
-72.1 -40.7 -128.7 -152.7 14.0 320.6 24.2 35.0
Balance -52.7 -21.6 -168.8 -77.0 16.7 249.3 26.2 27.5

14. 14
Two theories of global trade inequality
• Balassa-Samuelson: Low wage rate is due to low
productivity in export industries, compared to world
standard.
• Prebish-Singer: Low wage rate is due to low payment (at
equal- to - world productivity) in export industries.
• Result in both cases: Non-tradable products are paid below
productivity (measured at PPPs).