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CONSISTENT COMPARISONS OF REAL INCOMES ACROSS TIME AND SPACE

Published online by Cambridge University Press:  15 September 2009

Robert C. Feenstra ,
Hong Ma  and
D. S. Prasada Rao
Robert C. Feenstra
Affiliation:
University of California, Davis and National Bureau of Economic Research
Hong Ma
Affiliation:
Tsinghua University
D. S. Prasada Rao*
Affiliation:
The University of Queensland
*
Address correspondence to: D.S. Prasada Rao, School of Economics, The University of Queensland, St. Lucia, Queensland 4069, Australia; e-mail: p.rao@economics.uq.edu.au.
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Abstract

Consistent real income comparisons over time and space are critical for studies on catch-up and convergence. The paper provides an analytical framework for making real income comparisons across countries and over time that satisfy transitivity and at the same time reflect an underlying nonhomothetic utility function for a representative consumer. The concept of reference price comparisons is developed and implemented using nonhomothetic translog and almost ideal demand systems. The paper discusses a direct approach, which uses all the parameters of the demand system to make real income comparisons, and an indirect approach, which adjusts the national price-based comparisons using reduced information only on income elasticities of demand. The proposed approach is empirically implemented using data from the 1980 and 1996 benchmark data from the International Comparison Program, and the empirical results confirm the analytical results discussed in the paper.

Keywords

Real Income ComparisonsConstant Price ComparisonsNational Price-Based ComparisonsTransitivityNonhomothetic PreferencesTranslog Expenditure FunctionAlmost Ideal Demand System
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Supplement S2: Measurement with Theory , September 2009 , pp. 169 - 193
Copyright
Copyright © Cambridge University Press 2009

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