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Price Levels and Economic Growth : Making Sense of the PPP Changes Between ICP Rounds / Ravallion, Martin
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Ravallion, Martin
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Consumer price.
- Consumer price index.
- Cost of living.
- Debt Markets.
- E-Business.
- Economic growth.
- Economic Theory & Research.
- Emerging Markets.
- Exchange rates.
- Expenditure.
- Expenditures.
- Finance and Financial Sector Development.
- GDP.
- GDP per capita.
- Inflation.
- Inflation rates.
- Labor markets.
- Macroeconomics and Economic Growth.
- Market economy.
- Markets and Market Access.
- Price level.
- Price level changes.
- Price levels.
- Private Sector Development.
- Purchasing.
- Purchasing power.
- Real GDP.
- Surplus.
- Local Subjects:
- Consumer price.
- Consumer price index.
- Cost of living.
- Debt Markets.
- E-Business.
- Economic growth.
- Economic Theory & Research.
- Emerging Markets.
- Exchange rates.
- Expenditure.
- Expenditures.
- Finance and Financial Sector Development.
- GDP.
- GDP per capita.
- Inflation.
- Inflation rates.
- Labor markets.
- Macroeconomics and Economic Growth.
- Market economy.
- Markets and Market Access.
- Price level.
- Price level changes.
- Price levels.
- Private Sector Development.
- Purchasing.
- Purchasing power.
- Real GDP.
- Surplus.
- Physical Description:
- 1 online resource (29 pages)
- Other Title:
- Price Levels And Economic Growth
- Place of Publication:
- Washington, D.C., The World Bank, 2010
- System Details:
- data file
- Summary:
- To the surprise of many observers, the 2005 International Comparison Program (ICP) found substantially higher purchasing power parity (PPP) rates, relative to market exchange rates, in most developing countries. For example, China's price level index - the ratio of its PPP to its exchange rate - doubled between the 1993 and 2005 rounds of the ICP. The paper tries to explain the observed changes in PPPs. Consistently with the Balassa-Samuelson model, evidence is found of a "dynamic Penn effect," whereby more rapidly growing economies experience steeper increases in their price level index. This effect has been even stronger for initially poorer countries. Thus the widely-observed static (cross-sectional) Penn effect has been attenuated over time. On also taking account of exchange rate changes and prior participation in the ICP's price surveys, 99 percent of the variance in the observed changes in PPPs is explicable. Using a nested test, the World Bank's longstanding method of extrapolating PPPs between ICP rounds using inflation rates alone is out performed by the model proposed in this paper.
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