Alternative measures of output in global economic-environmental models: Purchasing power parity or market exchange rates?

Abstract

The study examines the question of the use of purchasing power parity versus market exchange rates in constructing global economic models. It compares three approaches: MER accounts, world-price PPP accounts, and superlative PPP accounts. It concludes that the best approach is to use superlative PPP accounts. This approach uses cross-sectional PPP measures for relative incomes and outputs and relies on national accounts price and quantity indexes for time-series extrapolations. Under ideal circumstances, this approach will provide accurate and consistent cross-sections and time series. This approach will require relatively little change in model structure from ones using MER accounts. The main concern would be to ensure that behavioral and reduced-form relationships in the models have been correctly estimated.