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The wealth and poverty of nations: true PPPs for 141 countries

Oulton, Nicholas (2011) The wealth and poverty of nations: true PPPs for 141 countries. CEP discussion papers, CEPDP1080. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

I set out a new method for estimating true (Konüs) PPPs. Household consumption per head deflated by these PPPs answers the question: by how much must the average expenditure per head of poor country A be increased to enable the typical inhabitant of A to enjoy the same utility level as the typical inhabitant of rich country B? Conventional multilateral PPPs for household consumption, such as the ones published by the World Bank, are not based explicitly on economic theory. So it is not clear that they can answer the question above, particularly if consumer demand is not homothetic. And there is overwhelming empirical evidence against homotheticity. The estimates of the standard of living in this paper are based on the economic theory of consumer demand. The main tool is the expenditure function. It turns out that it is not ne cessary to estimate all the parameters of the expenditure function but only the relatively small number which measure the consumer’s response to income changes. This makes the method feasible even when there are large numbers of products. The method is applied to 141 countries included in the World Bank’s 2005 International Comparison Program, at the level of 100 products. The results give strong support for nonhomotheticity and also for the importance of background factors such as climate, demography, culture and religion. The gap between the richest and the poorest countries is wider than when household consumption is deflated by a conventional multilateral index such as the World Bank’s PPP for consumption.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/default.asp
Additional Information: © 2012 The Author
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I31 - General Welfare; Basic Needs; Living Standards; Quality of Life; Happiness
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: CEPDP1080
Projects: Centre for Economic Performance, Productivity and Innovation Programme
Date Deposited: 15 Mar 2013 16:07
URL: http://eprints.lse.ac.uk/48941/

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