Preferences, Purchasing Power Parity, and Inequality: Analytical Framework, Propositions, and Empirical Evidence

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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

“…While Majumder et al (2015) compare the ICP PPPs with those from the Engel-based procedure described in Section III.iv, compare the PPPs from the wider selection of methods outlined in Section II. As noted in Majumder et al (2015), the 2011 Engelbased PPPs are generally higher than the 2011 ICP PPPs for many countries in most of the regions, but the reverse is the case for several African countries. Table 5 in Majumder et al (2015), reproduced here as Table 3, presents the counterfactual PPPs based on ICP data on broad item groups by income categories for rural and urban sectors, with India as base.…”

“…With the World Bank now releasing such information, Majumder et al (2015 have examined the robustness of the ICP PPPs by comparing them with the PPPs using the alternative methodologies described earlier. This largely explains the absence of studies that compare the PPPs from alternative methodologies and subject the ICP PPPs to robustness checks.…”

“…This largely explains the absence of studies that compare the PPPs from alternative methodologies and subject the ICP PPPs to robustness checks. Table 5 in Majumder et al (2015), reproduced here as Table 3, presents the counterfactual PPPs based on ICP data on broad item groups by income categories for rural and urban sectors, with India as base. With the World Bank now releasing such information, Majumder et al (2015 have examined the robustness of the ICP PPPs by comparing them with the PPPs using the alternative methodologies described earlier.…”

“…The drawback is that in the absence of price information the procedure is unable to accommodate sophisticated price effects. The procedure was originally proposed by the authors in the sub-national context of estimating spatial price indices in India (for a more recent empirical application, see Majumder et al, 2015a) and has been extended and applied to the cross-country context of estimating PPPs in Majumder et al (2015).…”

“…For example, the implementation of the international poverty line (IPL), typically denominated in US dollars, requires the use of PPPs to convert the IPL to local currencies. The importance of PPPs in cross-country welfare comparisons has been recognised in several recent contributions, including Edward and Sumner (2015), Gelb and Diofasi (2015), Inklaar and Rao (2015), Majumder et al (2015) and Ravallion (2016). The central role that PPPs play in poverty comparisons has given rise to the ICP which periodically updates the PPPs based on price and expenditure data obtained from the various countries.…”