Abstract
The relationship between the absolute and relative purchasing-power-parity (PPP) theories is restated theoretically. Then the relative PPP theory is tested using the GDP deflator and the cost of living as price-level concepts. The time periods are encompassed by 1950–1975; the countries are mainly but not exclusively in the Western industrial mode. It turns out that relative PPP is strongly supported by the evidence.
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References
Gilbert, Milton, and Associates, Comparative National Products and Price Levels (Paris: Organization for European Economic Cooperation, 1958).
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Appendix: The Data
Appendix: The Data
1.1 Absolute PPP
The absolute PPP measure is computed as the geometric mean of the PPPs calculated alternatively using the weighting pattern of the domestic country and that of the standard country. If the weights of only one of the countries are used for the PPP computation, then the calculated PPP will be biased in the direction of an overvalued PPP for that country (Houthakker 1962, p. 297; Officer 1976, pp. 15–16). Therefore no use is made of PPP measures for which only one of the weighting patterns is available.
Two data sources are used to obtain absolute-PPP measures under the GDP concept: Gilbert and associates (1958), who provide PPP data for the years 1950 and 1955, and Kravis et al. (1975), who offer such data for 1967 and 1970. The former authors use a GNP rather than GDP price-level concept. Because the PPP theory concerns prices and production within the boundaries of respective countries, GDP is the preferred concept, as it covers domestic rather than national production. In practice, PPP computations on a GNP basis differ minimally from those on a GDP basis.
The PPP data published by the German Statistical Office (Statistisches Bundesamt) are the source of the COL-concept measures.
1.2 GDP Deflator
The data source is OECD national-accounts publications for all countries except Hungary and Kenya, and United Nations (1973) for the latter two countries. For Hungary, GDP data are not available and a less-inclusive concept of domestic production, “net material product,” must be used.
1.3 Consumer Price Index
For all countries except the Soviet Union, the data source is International Monetary Fund (1977). For the Soviet Union, use is made of the “state retail price index,” published in International Labour Office (1962).
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Officer, L.H. (2022). Absolute and Relative Purchasing Power Parity. In: Essays in Economic History. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-95925-8_5
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