Skip to main content

Advertisement

SpringerLink
Log in

National and subnational purchasing power parity: a review

  • Research Article
  • Published:
DECISION Aims and scope Submit manuscript

Abstract

The measurement of prices is an important area of research in economics since prices play a central role in welfare analysis and macroeconomic comparisons across time and space. While accurate figures on inflation and cost of living are required in temporal comparisons of standard of living in a country and in adjusting poverty lines over time, such information is also essential in spatial comparisons of prices within and across countries. This paper presents a review of the literature on various aspects of price comparisons through purchasing power parity.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Source: Majumder et al. (2019)

Similar content being viewed by others

Notes

  1. References to relevant literatures on these aspects are given in the subsequent sections.

  2. Note that if the Fisher index is replaced by Tornqvist formula, the GEKS index can be derived from the stochastic CPD approach of Rao described below. However, Balk (2009) recently provided an overview of various multilateral methods and endorsed the GEKS-Fisher method as a centre stage method, particularly from the economic approach of international comparisons.

  3. See Balk (2009), Eq. (43) and Hill (2000), Eq. (10).

  4. Weinand and von Auer (2020) propose a multistage version of the weighted CPD model to analyse regional price information in Germany.

  5. The regression set-up arises because \(\widehat{a\left({p}^{d}\right)}\) and \(\widehat{a\left({p}^{0}\right)}\) are estimated values. See Coondoo et al. (2011) for a detailed description.

  6. See also Menon et al. (2017).

  7. For analytical purposes, the OECD classifies regions as the first administrative tier of subnational government (for example, States in the USA, Provinces in Canada or Régions in France). This classification is used by National Statistical Offices to collect information, and it represents in many countries the framework for implementing regional policies. While the number of regions (so-called Territorial Level 2 or TL2 in the OECD classification) varies from country to country, the international comparability is ensured by the fact that these administrative regions are officially established in countries.

  8. These maps have been drawn by Sattwik Santra.

  9. Weinand and von Auer (2020) provide evidence from Germany that price levels are spatially auto-correlated and largely driven by the cost of housing.

References

  • Almas I (2012) International income inequality: measuring PPP bias by estimating engel curves for food. Am Econ Rev 102(1):1093–1117

    Article  Google Scholar 

  • Almas I, Kjelsurd A, Somanathan R (2013) A behaviour-based approach to the estimation of poverty in India, NHH Department of Economics, Discussion Paper

  • Atella V, Menon M, Perali F (2004) Estimation of unit values in cross sections without quantity information and implications for demand and welfare analysis. In: Dagum C, Ferrari G (eds) Household behaviour, equivalence scales, welfare and poverty. Physica-Verlag, Heidelberg, pp 195–220

    Chapter  Google Scholar 

  • Aten B (1996) Evidence of spatial autocorrelation in international prices. Rev Income Wealth 42:149–163

    Article  Google Scholar 

  • Aten B, Menezes T (2002) Poverty price levels: an application to Brazilian metropolitan areas. In: World Bank ICP conference, Washington, D.C.

  • Balassa B (1964) The purchasing power parity doctrine: a reappraisal. J Polit Econ 72(6):584–596

    Article  Google Scholar 

  • Balk B (2009) Aggregation methods in international comparisons: an evaluation. In: Prasada Rao DS (ed) Purchasing power parities of currencies: recent advances in methods and applications. Edward Elgar, Cheltenham, pp 59–85

  • Banks J, Blundell R, Lewbel A (1997) Quadratic engel curves and consumer demand. Rev Econ Stat 79:527–539

    Article  Google Scholar 

  • Barten AP (1964) Family composition, prices and expenditure patterns. In: Hart PE, Mills G, Whitaker JK (eds) Econometric analysis for national economic planning. Butterworths, London, pp 277–292

    Google Scholar 

  • Bhattacharya N, Chatterjee GS, Pal P (1988) Variations in level of living across regions and social groups in India, 1963–64 and 1973–74. In: Srinivasan TN, Bardhan PK (eds) Rural poverty in South Asia. Oxford University Press, Oxford

    Google Scholar 

  • Bhattacharyya SS, Joshi PD, Roychowdhury AB (1980) Regional price indices based on NSS 25th round consumer expenditure data. Sarvekshana J NSS Org 34:107–121

    Google Scholar 

  • Biggeri L, De Carli R, Laureti T (2008) The interpretation of the PPPs: a method for measuring the factors that affect the comparisons and the integration with the CPI work at regional level. Paper presented at the joint UNECE/ILO meeting on consumer price indices, May 8–9, Geneva

  • Biggeri L et al (2010) Sub national PPPs based on integration with CPIs. Research project, draft proposal, paper presented at the 2nd ICP technical advisory group meeting, Washington DC, February 17–19

  • Biggeri L, Ferrari G, Yanyun Z (2017) Estimating cross province and municipal city price level differences in China: some experiments and results. Soc Indic Res 131(1):169–187

    Article  Google Scholar 

  • Brandt L, Holz C (2006) Spatial price differences in China: estimates and implications. Econ Dev Cult Change 55(1):43–86

    Article  Google Scholar 

  • Cavallo A, Rigobon R (2016) The billion prices project: using online prices for measurement and research. J Econ Perspect 30(2):151–178

    Article  Google Scholar 

  • Chakrabarty M, Majumder A, Ray R (2018) A framework for the simultaneous measurement of spatial variation and temporal movement in prices in a heterogeneous country: the dynamic household regional product dummy model, Review of Income and Wealth, Series 64, Number 3, September 2018, 703–730. DOI: 10.1111/roiw.12266

  • Chen C-F, Shen C-H, Wang C-A (2007) Does PPP hold for big mac price or consumer price index? Evidence from panel cointegration. Econ Bull 6(16):1–15

    Google Scholar 

  • Clements KW, Izan HY (1981) A note on estimating divisia index numbers. Int Econ Rev 22(3):745–747

    Article  Google Scholar 

  • Clements KW, Izan HY, Selvanathan EA (2006a) Stochastic index numbers: a review. Int Stat Rev 74(2):235–270

    Article  Google Scholar 

  • Clements K, Wu Y, Zhang J (2006b) Comparing international consumption patterns. Empir Econ 31:1–30

    Article  Google Scholar 

  • Clements KW, Lan Y, Seah SP (2010) The big mac index two decades on an evaluation of burgernomics. Economics Discussion working papers 10–14. University of Western Australia, Department of Economics

  • Coondoo D, Saha S (1990) Between-state differentials in rural consumer prices in india: an analysis of intertemporal variations. Sankhya Ser B 52(3):347–360

    Google Scholar 

  • Coondoo D, Majumder A, Ray R (2004) A method of calculating regional consumer price differentials with illustrative evidence from India. Rev Income Wealth 50(1):51–68

    Article  Google Scholar 

  • Coondoo D, Majumder A, Chattopdhyay S (2011) Estimating spatial consumer price indices through engel curve analysis. Rev Income Wealth 57(1):138–155

    Article  Google Scholar 

  • Costa A, Garcia J, Raymond JL, Sanchez-Serra D (2019) Subnational purchasing power of parity in OECD countries: estimates based on the Balassa-Samuelson hypothesis, OECD Regional Development Working Papers 2019/12, https://dx.doi.org/10.1787/3d8f5f51-en.

  • Cox TL, Wohlgenant MK (1986) Prices and quality effects in cross-sectional demand analysis. Am J Agr Econ 68(4):908–919

    Article  Google Scholar 

  • De Carli R (2010) Intra-national price level differentials: the Italian experience. In: Biggeri L, Ferrari G (eds) Price indexes in time and space: methods and practice. Springer, Berlin, pp 115–130

    Chapter  Google Scholar 

  • Deaton A (1988) Quality, quantity and spatial variation of price. Am Econ Rev 78(3):418–430

    Google Scholar 

  • Deaton A, Dupriez O (2011) Purchasing power parity exchange rates for the global poor. Am Econ J Appl Econ 3(2):137–166

    Article  Google Scholar 

  • Deaton AS, Friedman J, Alatas V (2004) Purchasing power parity exchange rates from household survey data: India and Indonesia. Working Paper No. 173, Research Program in Development Studies, Woodrow Wilson School, Princeton University

  • Diewert WE (2005) Weighted country product dummy variable regressions and index number formulae. Rev Income Wealth 51:561–570

    Article  Google Scholar 

  • Dikhanov Y, Palanyandy C, Capilit E (2011) Subnational purchasing power parities toward integration of international comparison program and consumer price index: the case of the Philippines, ADB Economics Working Paper Series, No. 290 | December 2011.

  • Drechsler L (1973) Weighting of index numbers in multilateral international comparisons. Rev Income Wealth 19(1):17–34

    Article  Google Scholar 

  • Feenstra RC, Ma H, Rao DSP (2009) Consistent comparisons of real incomes across time and space. Macroecon Dyn 13(Supplement):169–193

    Article  Google Scholar 

  • Froot KA, Rogoff K (1995) Perspectives on PPP and long-run real exchange rates. In: Grossman G, Rogoff K (eds) Handbook of international economics. North Holland Press, Amsterdam, vol 3

  • Geary RG (1958) A note on the comparison of exchange rates and PPPs between countries. J R Stat Soc Ser A 121:97–99

    Article  Google Scholar 

  • Gomez-Tello A, Diez-Minguela A, Martinez- Galarraga J, Tirado D (2018) Regional prices in early twentieth-century Spain: a country-product-dummy approach. Cliometrica. https://doi.org/10.1007/s11698-018-0175-3

    Article  Google Scholar 

  • Hill RJ (2000) Measuring substitution bias in international comparisons based on additive purchasing power parity methods. Eur Econ Rev 44:145–162

    Article  Google Scholar 

  • Hill RJ (2004) Constructing price indexes across space and time: the case of the European Union. Am Econ Rev 94:1379–1410

    Article  Google Scholar 

  • Hoang LV (2009) Estimation of food demand from household survey data in Vietnam, DEPOCEN Working paper series, no. 2009/12, https://www.depocenwp.org.

  • ILO/IMF/OECD/UNECE/Eurostat/The World Bank (2004) Consumer price index manual: theory and practice, Geneva, International Labour Office, Annex 4

  • Khamis SH (1972) A new system of index numbers for national and international purposes. J R Stat Soc Ser A. 135 (Part I): 96–121.

  • Konüs A (1939) The problem of the true index of the cost of living. Econometrica 7:10–29

    Article  Google Scholar 

  • Lan Y, Ong LL (2003) The growing evidence on purchasing power parity. In: Ong LL (ed) The big mac index: applications of purchasing power parity. Palgrave Macmillan, UK, pp 29–50

    Google Scholar 

  • Lewbel A (1989) Identification and estimation of equivalence scales under weak separability. Rev Econ Stud 56:311–316

    Article  Google Scholar 

  • Majumder A, Ray R (2017) Estimates of spatial prices in india and their sensitivity to alternative estimation methods and choice of commodities. Soc Indic Res 131(1):145–167

    Article  Google Scholar 

  • Majumder A, Ray R, Sinha K (2012) The calculation of rural-urban food price differentials from unit values in household expenditure surveys: a new procedure and comparison with existing methods. Am J Agr Econ 94(5):1218–1235

    Article  Google Scholar 

  • Majumder A, Ray R, Sinha K (2015a) Spatial comparisons of prices and expenditure in a heterogeneous country: methodology with application to India. Macroecon Dyn 19:931–989. https://doi.org/10.1017/S1365100513000576

    Article  Google Scholar 

  • Majumder A, Ray R, Sinha K (2015b) Estimating purchasing power parities from household expenditure data using complete demand systems with application to living standards comparison: India and Vietnam. Rev Income Wealth 61(2):302–328

    Article  Google Scholar 

  • Majumder A, Ray R, Santra S (2017) Sensitivity of purchasing power parity estimates to estimation procedures and their effect on living standards comparisons. J Glob Dev 8:1. https://doi.org/10.1515/jgd-2017-0006

    Article  Google Scholar 

  • Majumder A, Ray R, Santra S (2019) The spatial price map of India drawn using pseudo unit values. Indian Growth Dev Rev

  • Menon M, Perali F, Tommasi N (2017) Estimation of unit values in household expenditure surveys without quantity information. Stata J 17(1):222–239

    Article  Google Scholar 

  • Menon M, Perali F, Ray R, Tommasi N (2019) The tale of the two Italies: regional price parities accounting for differences in the quality of services, mimeograph

  • Mishra A, Ray R (2014) Spatial variation in prices and expenditure inequalities in Australia. Econ Record 90(289):137–159

    Article  Google Scholar 

  • Montero J-M, Laureti T, Minguez R, Fernández-Avilés G (2019) Stochastic model with penalized coefficients for spatial price comparisons: an application to regional price indexes in Italy. Rev Income Wealth. https://doi.org/10.1111/roiw.12422

    Article  Google Scholar 

  • Neary JP (2004) Rationalizing the penn world table: true multilateral indices for international comparisons of real income. Am Econ Rev 94:1411–1428

    Article  Google Scholar 

  • Oulton N (2012) How to measure living standards and productivity. Rev Income Wealth 58(3):424–456

    Article  Google Scholar 

  • Prais SJ, Houthakker HS (1955) The analysis of family budgets, 1971, 2nd edn. Cambridge University Press, Cambridge

    Google Scholar 

  • Prais SJ, Houthakker HS (1971) The analysis of family budgets, 2nd ed.Cambridge University Press, Cambridge [originally published 1955].

  • Rao DSP (1971) Existence and uniqueness of a new class of index numbers. Sankhyā Ser B 33:341–354

    Google Scholar 

  • Rao DSP (1995) On the equivalence of the generalized country-product-dummy (CPD) method and the Rao-system for multilateral comparisons, Working Paper No 5, Centre for International Comparisons, University of Pennsylvania, Philadelphia

  • Rao DSP (2001) Weighted EKS and generalised CPD methods for aggregation at basic heading level and above basic heading level, Joint World Bank–OECD Seminar on Purchasing Power Parities—recent advances in methods and applications, Washington D.C., 2001

  • Rao DSP (2005) On the equivalence of weighted country-product-dummy (CPD) method and the Rao-system for multilateral comparisons. Rev Income Wealth 51(4):571–580

    Article  Google Scholar 

  • Reddy S, Pogge T (2007) How not to count the poor. In: S. Anand and J. Stiglitz (eds.), Measuring Global Poverty, Oxford University Press, Oxford, 2007.

  • Rogoff K (1996) The purchasing power parity puzzle. J Econ Literature 34:647–668

    Google Scholar 

  • Samuelson P (1964) Theoretical notes on trade problems. Rev Econ Stat 46(2):145–154

    Article  Google Scholar 

  • Sarno L, Taylor M (2002) Purchasing power parity and the real exchange rate. IMF Staff Papers 49:65–105

    Google Scholar 

  • Selvanthan E (1991) Standard errors for Laspeyres and Paasche index numbers. Econ Lett 35:35–38

    Article  Google Scholar 

  • Summers R (1973) International price comparisons based upon incomplete data. Rev Income Wealth 19(1):1–16

    Article  Google Scholar 

  • Taylor M (2006) Real exchange rates and purchasing power parity: mean reversion in economic thought. Appl Financ Econ 16:1–17

    Article  Google Scholar 

  • Taylor A, Taylor MP (2004) The purchasing power parity debate. J Econ Perspect 18:135–158

    Article  Google Scholar 

  • Weinand S, von Auer L (2020) Anatomy of regional price differentials: evidence from micro-price data. Spatial Econ Anal. https://doi.org/10.1080/17421772.2020.1729998

    Article  Google Scholar 

  • World Bank (2013) Measuring the real size of the world economy: the framework, methodology, and results of the international comparison program. International Comparison Program, World Bank, Washington DC

    Book  Google Scholar 

  • World Bank (2015) Purchasing power parities and the real size of world economies: a comprehensive report of the 2011 international comparison program. World Bank, Washington, DC

    Google Scholar 

Download references

Acknowledgements

The authors thank an anonymous referee for helpful comments on an earlier version.

Author information

Authors and Affiliations

  1. Economic Research Unit, Indian Statistical Institute, Kolkata, India

    Amita Majumder

  2. Department of Economics, Monash University, Melbourne, Australia

    Ranjan Ray

Authors
  1. Amita Majumder
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ranjan Ray
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Amita Majumder.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Majumder, A., Ray, R. National and subnational purchasing power parity: a review. Decision 47, 103–124 (2020). https://doi.org/10.1007/s40622-020-00245-7

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40622-020-00245-7

Keywords

Search

Navigation