STILL NEEDS EDITING: Monetary Standardization in IPUMS International

Purchasing Power Parity (PPP) is a currency conversion measure that equalizes the purchasing power between different currencies across various economies by converting the various currencies to a common currency. This means that the currency units required to purchase a specific basket of goods and services in a given country in relation to a reference country is denoted by the PPP for the country. Hence, PPP controls for the difference in price level between countries and thereby enables us to compare the volume of purchased goods and services between countries.

The 2017 International Comparison Program (ICP) estimates of PPPs released in May 2020 and the PPPs created by World Development Indicators (WDI) are used. WDI extrapolates the ICP 2011 and ICP 2017 PPPs to develop annual PPPs for years before 2011 and after 2017 respectively. ICP 2017 revises the results of ICP 2011 and calculates the annual PPPs from 2012-2016 by interpolating the PPPs of 2011 and 2017, the reference years. All the economies in the IPUMS International database with variables reported as monetary values have participated in ICP 2017 except for Venezuela and Puerto Rico. ICP 2017 imputes PPPs for some of the nonparticipating economies including Puerto Rico but excluding Venezuela. Venezuela participated in ICP 2011 and hence we have PPPs for up to year 2011.

Source: Purchasing Power Parities and the Size of World Economies: Results from 2017 International Comparison Program

Detailed methodology

The methodology of the International Comparison Program (ICP) comprises of three primary elements – definition of final expenditures on GDP based on the System of National Accounts (SNA), basket of specifically defined goods and services from where items are selected for pricing such that they represent a crucial part of an economy’s final purchases and are comparable across different economies and the methodology used to determine the purchasing power parities (PPPs). All the participating economies provide data for the ICP reference year on prices for the chosen items, market exchange rates, resident population and based on a common classification, comprehensive breakdown of the national accounts in local currency units.

We have the PPPs for the reference years 2011 and 2017. The ICP interpolates the PPPs between 2012 to 2016 by first interpolating the basic heading PPPs between 2011 and 2017 and then aggregating using the weighted Gini-Élteto-Köves-Szulc (GEKS) method. The available regional PPPs between 2011 and 2017 were also interpolated using the country aggregation with redistribution (CAR) procedure.

Additionally, ICP imputes the PPPs of the nonparticipating economies by estimating two regressions jointly – one of the regression models is based on the price level index (PLI) for individual consumption expenditure of the households which also includes the nonprofit institutions serving households (NPISHs) and the other is based on the PLI for GDP – using the seemingly unrelated regression (SUR) method. The explanatory variables used includes imports and exports as a share of GDP, age dependency ratio and based on the market exchange rates, the GDP per capita in US dollars.

Thus, the ICP provides PPPs for reference years 2011 and 2017 and the years in between, i.e., 2012 to 2016. The World Development Indicators extrapolates the ICP 2011 PPPs to create annual PPPs before 2011 and the ICP 2017 PPPs to create annual PPPs after 2017. The method used to create a time series from 1990 to the latest year applies the difference between an economy’s observed rate of inflation over each period from 2011 and 2017 for years before 2011 and years after 2017 respectively compared with the rate of inflation in United States during the same period to the PPP estimates of the reference years.

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