International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food

Abstract

Price-adjusted data on national incomes applied in cross-country comparisons are measured with bias. By studying micro data, this paper finds that the bias is systematic: the poorer a country is, the more its income tends to be overestimated.The price-adjusted data of the Penn World Table are applied in studies of poverty, inequality, growth and convergence. Hence, the bias alters the findings of these studies. This paper estimates both the bias and the subsequent consequences for estimates of inequality and convergence. The findings are that international income inequality tends to be underestimated whereas the convergence between poor and rich countries tends to be overestimated when analyses are based on the Penn World Table. The biases in the macro price variables are caused by factors analogous to those that create bias in consumer price indices. Exploiting this feature, the bias in the cross country comparable macro prices is measured by comparing estimated Engel curves for food, a method already established in measuring biases in consumer price indices.

Beyond Engel’s Law - Pursuing an Engelian Approach to Welfare: A Cross Country Analysis

“…The shape of the Engel curve can thus be expected to change as well. As the results presented by Almås (2012) indicate that PPP adjusted income is over-adjusted, the "true" income adjustment should lie between real income at constant prices (constant U.S. $ at 2005 prices) and PPP adjusted income at constant prices (Geary-Khamis international dollar, i.e., I$). Therefore, the charts depicted in the following sections plot expenditure share observations on real GDP (maroon circles) and PPP adjusted real GDP (gray triangles).…”

“…More recently, Engel's law is even used to correct purchasing power parities (Almås, 2012). Although Engel's law is an essential nonmonetary determinant when distinguishing between poverty and wealth, it covers only one decreasing fraction of consumer expenditure as income rises.…”

The Engel Curve of Owner-Occupied Housing Consumption

“…Moreover, the applicability of Engel curves is not limited to taxation and forecasts, but includes estimating CPI biases (Hamilton 2001 andRøed Larsen 2007), PPP biases (Almås 2012), and material standards of living (Røed Larsen 2009). Engel curves have also been the topic of other recent econometric research (Blundell, Browning, andCrawford 2003 andBlundell, Chen, andKristensen 2007).…”

Cross-Country Income Levels over Time: Did the Developing World Suddenly Become Much Richer?

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