PPP Exchange Rates Research Articles

Capitalism and extreme poverty: A global analysis of real wages, human height, and mortality since the long 16th century

This paper assesses claims that, prior to the 19th century, around 90% of the human population lived in extreme poverty (defined as the inability to access essential goods), and that global human welfare only began to improve with the rise of capitalism. These claims rely on national accounts and PPP exchange rates that do not adequately capture changes in people’s access to essential goods. We assess this narrative against extant data on three empirical indicators of human welfare: real wages (with respect to a subsistence basket), human height, and mortality. We ask whether these indicators improved or deteriorated with the rise of capitalism in five world regions - Europe, Latin America, sub-Saharan Africa, South Asia and China – using the chronology put forward by world-systems theorists. The evidence we review here points to three conclusions. (1) It is unlikely that 90% of the human population lived in extreme poverty prior to the 19th century. Historically, unskilled urban labourers in all regions tended to have wages high enough to support a family of four above the poverty line by working 250 days or 12 months a year, except during periods of severe social dislocation, such as famines, wars, and institutionalized dispossession – particularly under colonialism. (2) The rise of capitalism caused a dramatic deterioration of human welfare. In all regions studied here, incorporation into the capitalist world-system was associated with a decline in wages to below subsistence, a deterioration in human stature, and an upturn in premature mortality. In parts of South Asia, sub-Saharan Africa, and Latin America, key welfare metrics have still not recovered. (3) Where progress has occurred, significant improvements in human welfare began several centuries after the rise of capitalism. In the core regions of Northwest Europe, progress began in the 1880s, while in the periphery and semi-periphery it began in the mid-20th century, a period characterized by the rise of anti-colonial and socialist political movements that redistributed incomes and established public provisioning systems.

A note on estimating income inequality across countries using PPP exchange rates

AbstractThe use of exchange rates based on Purchasing Power Parities to compare incomes across countries and over time has now become standard practice. But there are reasons to believe that this could lead to excessively inflated incomes for poorer countries and in some cases also inflate the extent of real changes over time. Estimates of gross domestic product growth in the Chinese and Indian economies in recent years provide examples of this.

The PPP and Equilibrium Exchange Rate of RMB

This paper compares various methods of measuring the equilibrium exchange rate. We believe that it should be considered the three aspects of essential attribute of the exchange rate, the economic situation and regulating needs of policies when it comes to the measure of RMB equilibrium exchange rate. The paper points out that the extended PPP method is more appropriate than the FEER approach and it is a “second-best” choice. Then we make a systematic review of the literatures and commentary on how to measure equilibrium exchange rate properly with the application of PPP. We believe that the extended PPP approach would be better suited to measure RMB equilibrium exchange rate than the other relative PPP methods. According to the PPP data published in 2005 by the World Bank, we have successfully countered and interpret a series of statement which were suspected overvaluation of Chinese PPP, accordingly it is very difficult to reach the conclusion that RMB exchange rate has been seriously underestimated, which mean that the current price level in China is compatible with the economic level and the ratio of prices with other countries is basically normal.

Comments by Suresh Narayanan, on In Search of a Strategy for Making Growth More Pro-Poor in the Philippines

Comments by Suresh Narayanan, on In Search of a Strategy for Making Growth More Pro-Poor in the Philippines

A Cost Effectiveness Analysis of Salt Reduction Policies to Reduce Coronary Heart Disease in Four Eastern Mediterranean Countries

BackgroundCoronary Heart Disease (CHD) is rising in middle income countries. Population based strategies to reduce specific CHD risk factors have an important role to play in reducing overall CHD mortality. Reducing dietary salt consumption is a potentially cost-effective way to reduce CHD events. This paper presents an economic evaluation of population based salt reduction policies in Tunisia, Syria, Palestine and Turkey.Methods and FindingsThree policies to reduce dietary salt intake were evaluated: a health promotion campaign, labelling of food packaging and mandatory reformulation of salt content in processed food. These were evaluated separately and in combination. Estimates of the effectiveness of salt reduction on blood pressure were based on a literature review. The reduction in mortality was estimated using the IMPACT CHD model specific to that country. Cumulative population health effects were quantified as life years gained (LYG) over a 10 year time frame. The costs of each policy were estimated using evidence from comparable policies and expert opinion including public sector costs and costs to the food industry. Health care costs associated with CHDs were estimated using standardized unit costs. The total cost of implementing each policy was compared against the current baseline (no policy). All costs were calculated using 2010 PPP exchange rates. In all four countries most policies were cost saving compared with the baseline. The combination of all three policies (reducing salt consumption by 30%) resulted in estimated cost savings of $235,000,000 and 6455 LYG in Tunisia; $39,000,000 and 31674 LYG in Syria; $6,000,000 and 2682 LYG in Palestine and $1,3000,000,000 and 378439 LYG in Turkey.ConclusionDecreasing dietary salt intake will reduce coronary heart disease deaths in the four countries. A comprehensive strategy of health education and food industry actions to label and reduce salt content would save both money and lives.

DOES THE BALASSA–SAMUELSON THEORY EXPLAIN THE LINK BETWEEN RELATIVE POPULATION GROWTH AND PURCHASING POWER PARITY?

Relative population growth affects relative prices through the so-called Balassa–Samuelson (BS) mechanism and that in turn impacts PPP. This paper empirically investigates the relationship between the PPP exchange rate and relative population growth in a panel of 80 selected countries. Following the BS hypothesis, this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel cointegration and fully modified ordinary least square (FMOLS), the empirical results show that there is a stable relationship between PPP exchange rate and relative population growth in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.

Dual equilibrium and growth cycle in Argentina

Argentina’s GDP growth cycle, tracing the high exchange rate volatility in 1970–2008, is discussed. Growth depends on foreign exchange availability. The country’s comparative advantage is in agriculture, but manufactured exports are grow faster. Two remarkably different PPP exchange rates coexist – one appropriate for agriculture and one for manufacturing – destabilising the market exchange rate. Thus, two unstable growth equilibria coexist generating GDP fluctuations. Currency devaluation sets the cycle’s ceiling and the end of devaluation sets the cycle’s floor. Chronic government deficits widen the cycle, harming institutions and decelerating growth. A land tax to finance rural investment would facilitate a high and stable exchange rate (AR$/US$) and convergence to the high growth equilibrium.

Understanding PPPs and PPP-based National Accounts: Comment

Angus Deaton and Alan Heston (2010) have done a valuable service in providing just such a guide. Their paper is also a timely contribution given that the final results of the 2005 International Comparison Program (ICP) were released in 2008, provid ing PPP exchange rates based on the ICP price surveys (World Bank 2008a, 2008b). And, a new version of Penn World Tables (PWT 7.0), using the price data from the 2005 ICP, is expected soon. The paper is also timely from the point of view of the design of the forthcoming 2011 ICP. The authors generally focus on the methodological issues rather than specific country results. The big exception is China. The new PPP for China has attracted much public attention and Deaton and Heston (2010) refer to China 40 times. I will begin with some comments on what they say about China's PPP. I will then turn to the broader methodological issues they raise. The final section comments on some implications for current knowledge about macroeconomic aggregates and for cross country regressions, including growth empirics.

The Poverty of Statistics and the Statistics of Poverty

This paper offers a critique of the picture of world growth and world inequality generally disseminated by international agencies. The positive view commonly presented depends on the widespread consensus that economic performance should be measured using ‘Purchasing Power Parity’ (PPP) statistics, instead of market exchange rates. Although originally conceived narrowly as a basis for comparing living standards, PPP indicators are now indiscriminately promoted as an unexceptionable standard for comparing and aggregating national income statistics. This article highlights the flaws in the PPP approach by accepting the claims made on their behalf at face value. It shows that, even on the basis of these claims, the wrong conclusions have been drawn. By comparing PPP and market exchange rate measures of inequality it shows that what really took place, at the end of the last century, was a systematic reduction in the prices of consumption goods in the Third World. PPP statistics have concealed this underlying and unsustainable trend, allowing it to be packaged as a stable reduction in poverty. Neither genuine growth, nor lasting poverty reduction was achieved over this period. The fall in the price of consumer goods masked a systematic failure to overcome the central problem of development—the high price of capital goods, which PPP statistics understate, and of intermediate goods, which they completely omit.

Consumer Substitution, Cost of Living Measurement and Real Exchange Rate in Argentina - First Part: 1960-1995 (Long Version, in Spanish) (Sustitucion en el Consumo, Medición del Costo de Vida y Tipo de Cambio Real en la Argentina - Primera Parte: 1960-1995)

Ordinary consumer price indices customarily overstate increases in the cost of living because they do not allow for consumer substitution as relative prices change. This study looks for a more accurate measure of variations in the cost of living in Argentina over the years 1960 to 1995, taking account of consumer substitution, and for applying it to the question of estimating PPP exchange rates. A second paper will analyze the subsequent years 1996-2006. The main finding is that over 35 years (1960-95), the Consumer Price Index of Argentina overstated the rise in the true cost of living by 77% relative to the estimated cost of living index. Put in a different way, 44% of official inflation was avoided by consumers through substitution between goods, brands and outlets. The estimated cost of living index based in 1960 was in 1995 just 56% of the official index value. Concerning the value of Argentine currency, this study computes a purchasing-power-parity (PPP) exchange rate for 1960-95, based on a United Nations ECLA estimation of PPP exchange rates in various Latin American countries for the year 1960, updated with estimated cost of living indices for Argentina and the United States. For the US, studies by several authors are used to estimate a cost of living index controlling for the CPI's substitution bias, consistent with the index used for Argentina. The conclusions are that the exchange rate in Argentina was almost always above PPP during 1960-90, with the exception of 1979-81. It is also shown that the PPP rate was below the rate of one peso to the dollar when the latter was established by the so-called Convertibility Law in March 1991, but the PPP rate rapidly and smoothly converged to one peso per dollar during 1991-92, and remained in the close vicinity of the actual rate of exchange in subsequent years. A shorter English version is at http://ssrn.com/abstract=1437383.

Consumer Substitution, Cost of Living Indices and Exchange Rate in Argentina - First Part: 1960-1995

This paper reviews the theory of the true cost of living index and its approximation through superlative index numbers, as well as the Vartia quantum theory of bias in index numbers as applied to substitution bias in consumer price indices. Estimated adjustments are proposed for the Argentine Consumer Price Index on account of consumer substitution, for the period 1960-1995. Annual substitution is shown to be a relatively minor proportion of annual inflation, but to accumulate a sizable effect over the years. The absolute effect varies with the absolute size of annual inflation. Substitution bias in the CPI is shown to have a strong effect on estimates of the historical inflation record and the PPP exchange rates in the 1990s.

Purchasing Power Parity with Strategic Markets

The paper shows that market power may be an additional cause for the failure of PPP without making the usual assumption of segmentation of national markets. We construct an international multi-currency economy based on the strategic market game model with multiple trading posts, where, besides sellers, buyers have market power as well. Although arbitrage is costless, PPP may fail and exchange rates may be inconsistent at equilibrium due to agents' price effects in currency and commodity markets. We derive conditions on individual net trades and elasticities that result in PPP violation and exchange rate inconsistencies. A numerical example shows that when consistency fails, the ordering of prices is not well-defined. When the number of agents in the economy increases, PPP deviations and inconsistencies tend to zero, thus providing a strategic foundation of PPP theory. Furthermore, the size of PPP deviations is positively related to the number of currencies traded.

ARE SERVICES INCOME‐ELASTIC? SOME NEW EVIDENCE

The hypothesis that the demand for services is income‐elastic tended to find support in early empirical work. Recent studies however, adopting improved methodologies and better international data (based on PPP exchange rates), have challenged this conventional wisdom. Using an updated, disaggregated dataset covering 60 countries in 1980 this paper re‐estimates income and price elasticities of demand for services. It rejects the income‐elastic argument overall but confirms a wide range of income elasticity estimates (above and below unity) across different types of services. Estimates are also shown to be sensitive to the a priori model of service demand.

Exchange rate expectations and risk premium in the Singapore/US dollar exchange rate: evidence from survey data

Survey data on the expectations of the Singapore/US dollar exchange rate are employed to evaluate (i) the role of exchange rate expectations in the pricing of the forward exchange rate, (ii) the rationality of foreign exchange market expectations and (iii) the nature of expectation formation mechanisms. The analyses indicate that movements in the forward discount mainly reflect expectations of future changes in the exchange rate and expectations of the market are not rational. In addition, expectations are best characterized as regressing toward the equilibrium PPP exchange rate The views expressed in this paper are solely the authors' and do not necessarily reflect those of the Monetary Authority of Singapore