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International Income Inequality: Measuring PPP bias by estimating Engel curves for food

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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.

Year: 2007
OAI identifier: oai:CiteSeerX.psu:10.1.1.352.3752
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