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American Economic Review: Vol. 102 No. 2 (April 2012)

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

Article Citation

Almås, Ingvild. 2012. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food." American Economic Review, 102(2): 1093-1117.

DOI: 10.1257/aer.102.2.1093

Abstract

Purchasing power-adjusted incomes applied in cross-country comparisons are measured with bias. This paper estimates the purchasing power parity (PPP) bias in Penn World Table incomes and provides corrected incomes. The bias is substantial and systematic: the poorer a country, the more its income tends to be overestimated. Consequently, international income inequality is substantially underestimated. The methodological contribution is to exploit the analogies between PPP bias and the bias in consumer price index (CPI) numbers. The PPP bias and subsequent corrected incomes are measured by estimating Engel curves for food, an established method of measuring CPI bias. (JEL C43, D31, E31, O11, O12)

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Authors

Almås, Ingvild (Norwegian School of Economics and Business Administration)

JEL Classifications

C43: Index Numbers and Aggregation; Leading indicators
D31: Personal Income, Wealth, and Their Distributions
E31: Price Level; Inflation; Deflation
O11: Macroeconomic Analyses of Economic Development
O12: Microeconomic Analyses of Economic Development


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