Using Expenditure PPPs for Sectoral Output and Productivity Comparisons

Abstract

P power parities (PPPs) have a wide range of analytical and policy applications.1 Traditionally, PPPs have been used for international comparisons of income, expenditure, and output. Most well known are the comparisons of levels of gross domestic product (GDP) per capita as published by the World Bank (e.g., World Bank 2008). Diff erences in GDP per capita across countries are mainly determined by levels of labor productivity at the aggregate economy level. Today, comparative series of output per worker and per hour worked are being produced routinely by various statistical organizations and in academia, such as the Penn World Table and the series produced by the Organisation for Economic Co-operation and Development (OECD), Conference Board, and Groningen Growth and Development Centre (GGDC) at the University of Groningen. Various useful analytical applications of productivity levels, however, are also found at the more detailed level of individual industries. Because of the large diff erences in economic structure across countries, international comparisons of output and productivity at the sector level (agriculture, manufacturing, and services) provide useful complements to comparisons of GDP by expenditure categories. Previous research has shown that a low overall level of productivity is not necessarily indicative of large gaps in all sectors. Generally, it is assumed that productivity gaps in manufacturing can be large, and that gaps in services productivity across countries are much smaller. Th is well-known fi nding is at the heart of the Harrod-Balassa-Samuelson eff ect and often invoked to explain the lower relative prices of services in low-income countries compared with high-income countries. Also, studies of convergence and divergence in the world economy are increasingly being made at the industry level. Tests of international trade theories and endogenous growth models require measures relative to the world productivity frontier by sector. By defi nition, a major part of the research in these areas requires PPPs from the production side rather than from the expenditure side—that is, PPPs should refl ect the diff erences in the output 24