Approaches to purchasing power parity and real product comparisons using shortcuts and reduced information
Ahmad, S.
The present work investigates various procedures for estimating purchasing power parities (PPPs), which are more economical in their requirements. Two approaches are pursued here: (1) a short-cut approach which attempts to exploit structual relationships between real national income in a country and associated monetary and/or non-monetary indicators; and (2) a reduced information approach in which PPPs are estimated on the basis of small subsets of price data which can be collected cheaply in the countries being compared. Shortcuts based on a monetary indicator, nominal income, and supplemented with other financial and physical indicator variables, provide a basis for estimating PPPs which is a substantial improvement over the use of exchange rates. Furthermore, a systematic experimentation with a large data base collected for international comparisons suggests that a significant reduction in the number of prices collected in each country could be carried out without serious degradation of quality of PPP estimates.
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