An exploration of the changes in the international comparison program’s global economic landscape

Abstract

The Purchasing Power Parity (PPP) rates from the 2011 round of the International Comparison Program (ICP) imply some dramatic revisions to price levels and real incomes across the world as compared to the prior 2005 round. This has important implications for many cross-country comparisons, including measures of poverty and inequality. Without presuming that either round is better methodologically, the paper tries to help the community of ICP users better understand the economic factors underlying the estimated changes in price levels across countries. Differences in domestic inflation rates have played a role, as expected. Two other factors are identified. The excess sensitivity to changes in market exchange rates suggests that the PPPs may put higher weight on internationally traded goods than do domestic deflators. Additionally, faster growing countries have seen a steeper rise in their PPP relative to market exchange rates; this can be explained by a tendency for wage increases in growing economies to lead to a higher price level. Together these factors account for over 70% of the variance in PPP changes even ignoring methodological changes. However, an independent downward drift in price levels is also evident, concentrated in the ICP’s Asia region. A possible explanation lies in the Asia region’s greater success (relative to other regions) in removing urban bias in the price surveys.