DP2590 True Multilateral Indexes for International Comparisons of Real Income: Theory and Empirics

Author(s): J Peter Neary
Publication Date: October 2000
Keyword(s): Exchange Rates, GAIA System, Geary Method, Index Numbers of Prices And Real Incomes, International Comparisons Of Real Incomes, Penn World Table, Purchasing Power Parities, QUAIDS (Quadratic Almost Ideal Demand System)
JEL(s): D10, F00
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2590

I introduce a utility-consistent benchmark for international comparisons of real income, the GAIA (?Geary-Allen International Accounts?) System. It coincides with the Geary method (which underlies the Penn World Table) when preferences are Leontief and with the EKS method (favoured by OECD) when preferences are homogeneous quadratic. The Geary method seems preferable since it gives a (possibly poor) approximation to a consistent set of international comparisons, whereas the EKS method gives a good approximation to an inconsistent set. An illustrative empirical application, using estimates of a QUAIDS demand system, suggests that both methods impose excessive ?convergence? on the data.