Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds
To the surprise of many observers, the 2005 International Comparison Program (ICP) found substantially higher purchasing power parity (PPP) rates, relative to market exchange rates, in most developing countries. For example, China s price level index -- the ratio of its PPP to its exchange rate -- doubled between the 1993 and 2005 rounds of the ICP. The paper tries to explain the observed changes in PPPs. Consistently with the Balassa-Samuelson model, evidence is found of a "dynamic Penn effect," whereby more rapidly growing economies experience steeper increases in their price level index. This effect has been even stronger for initially poorer countries. Thus the widely-observed static (cross-sectional) Penn effect has been attenuated over time. On also taking account of exchange rate changes and prior participation in the ICP s price surveys, 99 percent of the variance in the observed changes in PPPs is explicable. Using a nested test, the World Bank s longstanding method of extrapolating PPPs between ICP rounds using inflation rates alone is out performed by the model proposed in this paper.
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dig-okr-1098637292021-04-23T14:02:12Z Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds Ravallion, Martin BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS To the surprise of many observers, the 2005 International Comparison Program (ICP) found substantially higher purchasing power parity (PPP) rates, relative to market exchange rates, in most developing countries. For example, China s price level index -- the ratio of its PPP to its exchange rate -- doubled between the 1993 and 2005 rounds of the ICP. The paper tries to explain the observed changes in PPPs. Consistently with the Balassa-Samuelson model, evidence is found of a "dynamic Penn effect," whereby more rapidly growing economies experience steeper increases in their price level index. This effect has been even stronger for initially poorer countries. Thus the widely-observed static (cross-sectional) Penn effect has been attenuated over time. On also taking account of exchange rate changes and prior participation in the ICP s price surveys, 99 percent of the variance in the observed changes in PPPs is explicable. Using a nested test, the World Bank s longstanding method of extrapolating PPPs between ICP rounds using inflation rates alone is out performed by the model proposed in this paper. 2012-03-19T18:38:46Z 2012-03-19T18:38:46Z 2010-03-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100318141230 http://hdl.handle.net/10986/3729 English Policy Research working paper ; no. WPS 5229 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region |
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English |
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BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS |
| spellingShingle |
BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS Ravallion, Martin Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| description |
To the surprise of many observers, the
2005 International Comparison Program (ICP) found
substantially higher purchasing power parity (PPP) rates,
relative to market exchange rates, in most developing
countries. For example, China s price level index -- the
ratio of its PPP to its exchange rate -- doubled between the
1993 and 2005 rounds of the ICP. The paper tries to explain
the observed changes in PPPs. Consistently with the
Balassa-Samuelson model, evidence is found of a
"dynamic Penn effect," whereby more rapidly
growing economies experience steeper increases in their
price level index. This effect has been even stronger for
initially poorer countries. Thus the widely-observed static
(cross-sectional) Penn effect has been attenuated over time.
On also taking account of exchange rate changes and prior
participation in the ICP s price surveys, 99 percent of the
variance in the observed changes in PPPs is explicable.
Using a nested test, the World Bank s longstanding method of
extrapolating PPPs between ICP rounds using inflation rates
alone is out performed by the model proposed in this paper. |
| format |
Publications & Research :: Policy Research Working Paper |
| topic_facet |
BENCHMARK BENCHMARKS BUSINESS SERVICES COMMODITIES COMPETITIVE MARKET CONSUMER PRICE CONSUMER PRICE INDEX COST OF LIVING COUNTRY FIXED EFFECT CURRENCY DEFLATORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DOMESTIC PRICES DUMMY VARIABLE ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC HISTORY ECONOMIC LIBERALIZATION ECONOMIC PERFORMANCE ECONOMIC THEORY ELASTICITY EXCHANGE RATE EXCHANGE RATES EXPECTED VALUE EXPENDITURE EXPENDITURES EXPORTS FACTORS OF PRODUCTION GDP GDP DEFLATOR GDP PER CAPITA GROWTH RATES GROWTH RATE HUMAN CAPITAL INCOME INCOME LEVEL INDEX NUMBERS INFLATION INFLATION RATE INFLATION RATES INFORMATION TECHNOLOGY INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INTERNATIONAL COMPARISON INTERNATIONAL COMPARISONS INTERNATIONAL ECONOMICS LABOR MARKETS LOCAL CURRENCY MACROECONOMIC DATA MACROECONOMICS MARGINAL PRODUCT MARKET ECONOMY MIDDLE-INCOME COUNTRIES MISSING DATA NATURAL RESOURCE POLITICAL ECONOMY POWER PARITIES POWER PARITY PRICE LEVEL PRICE LEVEL CHANGES PRICE LEVELS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PURCHASING PURCHASING POWER REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL GROWTH RATES REAL INCOME RELIABILITY RESERVE RESULT RESULTS RETURN STRUCTURAL CHANGE SURPLUS SURPLUS LABOR TECHNOLOGICAL CHANGE UNDERVALUATION USERS USES WAGE RATES WAGES WEALTH WEB WORLD DEVELOPMENT INDICATORS |
| author |
Ravallion, Martin |
| author_facet |
Ravallion, Martin |
| author_sort |
Ravallion, Martin |
| title |
Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| title_short |
Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| title_full |
Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| title_fullStr |
Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| title_full_unstemmed |
Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds |
| title_sort |
price levels and economic growth : making sense of the ppp changes between icp rounds |
| publishDate |
2010-03-01 |
| url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100318141230 http://hdl.handle.net/10986/3729 |
| work_keys_str_mv |
AT ravallionmartin pricelevelsandeconomicgrowthmakingsenseofthepppchangesbetweenicprounds |
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1756571393976172544 |