Comparing the Incomes of Nations: A Critique of the International Comparison Project

Abstract

THIS ARTICLE'S MAIN PURPOSE iS to discuss certain key problems that arise in calculating purchasing-power parities (PPPs) when making international comparisons of real product, while reviewing partially the work of Irving Kravis, Alan Heston and Robert Summers (1982). Before beginning the discussion, the author wishes to record his opinion that this work of Kravis, Heston and Summers, carried out and successively published over the past 15 years, represents one of the great contributions to applied economics. In the article that precedes this one, Kravis provides a survey of the applications of this type of data, but it must be emphasized that any such listing can do only partial justice to the scope of new applications which seem to arise almost every day. Apart from applications to various aspects of international economic policy, there is so much greater international variation in basic economic variables, such as real income and relative prices, than is usually found in typical intranational/intertemporal comparisons, that the new data inevitably represent an enormous increment in our science's general capacity for statistical experiment. Thus, the debt owed to this team of research workers, by the economics profession at large, is immeasurable. A is essentially a form of international or interregional price index, complicated, but not essentially changed, by the existence of national currencies. For example, suppose we found, by some kind of index-number calculation, that the general price level in region A was 10 percent higher than in region B of the same country. Given a common currency, the between the money circulating in the two regions is clearly 1.0, but the for region A, in comparison with region B, is 0.91, this being the number by which it is necessary to multiply a given nominal income in A to give it the same purchasing power as a corresponding income in B. It follows that the must be some average of the ratios among individual prices in the two regions. In the case of two countries with different currencies, one can speak of a commodity PPP as being the rate of exchange between the two currencies which would equalize the price of a given commodity; then the general for the two countries is some average of the PPPs. In international, as in intertemporal, comparisons, there is a duality between the problem of measuring price levels and