Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income
American Economic Review · 2004 · Volume 94 · Issue 5
Abstract
Real incomes are routinely compared internationally using methods that "correct" for deviations from purchasing power parity. The most widely used of these is the Geary method which, though theoretically suspect, underlies the Penn World Table. This paper provides a theoretical foundation for the Geary method which I call the GAIA ( "Geary-Allen International Accounts" ) system. I show that the Geary method is exact when preferences are non-homothetic Leontief and, more generally, gives a ( possibly poor ) approximation to the GAIA benchmark. An empirical application suggests that both it and other widely used methods underestimate the degree of international inequality.
Keywords
Index Numbers and Aggregation, Leading indicators, Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts, Foreign Exchange, Macroeconomic Aspects of International Trade and Finance: General
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