International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food
American Economic Review · 2012 · Volume 102 · Issue 2
Abstract
Purchasing power-adjusted incomes applied in cross-country comparisons are measured with bias. This paper estimates the purchasing power parity (PPP) bias in Penn World Table incomes and provides corrected incomes. The bias is substantial and systematic: the poorer a country, the more its income tends to be overestimated. Consequently, international income inequality is substantially underestimated. The methodological contribution is to exploit the analogies between PPP bias and the bias in consumer price index (CPI) numbers. The PPP bias and subsequent corrected incomes are measured by estimating Engel curves for food, an established method of measuring CPI bias. (JEL C43, D31, E31, O11, O12)
Keywords
Index Numbers and Aggregation, Leading indicators, Personal Income, Wealth, and Their Distributions, Price Level, Inflation, Deflation, Macroeconomic Analyses of Economic Development, Microeconomic Analyses of Economic Development
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