Estimating Purchasing Power Parities from Household Expenditure Data Using Complete Demand Systems with Application to Living Standards Comparison: India and Vietnam

Abstract

This study departs from the previous literature on purchasing power parity (PPP) by proposing a demand system based methodology for calculating the PPP that takes account of consumer preferences and allows for the substitution effect of price changes. The methodology is used to calculate the PPP between the Indian Rupee and the Vietnamese Dong. The study allows for regional variation in preferences and price changes both inside the country and between countries. It proposes and applies a methodology for constructing prices from unit values after adjusting them for quality and demographic effects. The adjusted unit values are used as prices in the demand estimations, and the demand parameter estimates are used to calculate both spatial prices within each country and the PPP between the two countries within a consistent framework. The study illustrates the usefulness of preference consistent methods to calculate the PPP by applying the PPPs to compare living standards between India and Vietnam. The significance of the results follows from the fact that the levels of living comparisons are quite sensitive to the PPP used in converting the Rupee expenditure into Vietnamese Dong. The present results on food PPPs question the relevance of the PPPs from the ICP project in cross-country welfare comparisons especially in a period of high food inflation.JEL Codes: C18, D11, E31, O53

The Role of Prices in Welfare Comparisons: Methodological Developments and a Selective Survey of the Empirical Literature

“…Several cases of changes in state rankings are reported over the period spanned by the four NSS surveys considered in this study. 12 The study by Majumder Ray and Sinha (2015b) adopts a different methodology from that used by Aten (2016) who estimates 'regional PPP', i.e. For example, in round 61, Punjab is ranked quite high among the rural states, but slips down several places in the corresponding urban rankings.…”

“…Majumder et al (2015b) depart from this practice by estimating the bilateral PPP between India and Vietnam based on these two countries' living standards surveys alone. It is odd that to find out the bilateral PPP between India and Vietnam, for example, one has to start from their multilaterally determined PPPs which involve, on the latest ICP round, 200 or so countries most of whom are far removed from India and Vietnam in preferences, standard of living, geographical location and numerous other characteristics.…”

“…It is odd that to find out the bilateral PPP between India and Vietnam, for example, one has to start from their multilaterally determined PPPs which involve, on the latest ICP round, 200 or so countries most of whom are far removed from India and Vietnam in preferences, standard of living, geographical location and numerous other characteristics. Majumder et al (2015b) depart from this practice by estimating the bilateral PPP between India and Vietnam based on these two countries' living standards surveys alone. Another distinctive feature of this analysis is that sub-national PPPs incorporating ruralurban differences in preferences and standard of living are used in the comparison of living standards between the two countries based on the Sen (1976) welfare measure described earlier.…”

“…See the appendix inSen (1976).12 The study byMajumder Ray and Sinha (2015b) adopts a different methodology from that used by Aten (2016) who estimates 'regional PPP', i.e. spatial prices, and regional incomes for the different US states.© 2017 Economic Society of Australia…”

The Validity of Purchasing Power Parity in BRICS Countries

“…Of course, high infl ation rates reduce the value of the currency of the country (Enders and Falk, 1998). If expressed in a common currency, PPP offers the necessary adjustments to market exchange rates in order for the price of an item to be identical as in two countries (Majumder, Ray and Sinha, 2011).…”