In ErikOSorensen/pppindexr: Price and Quantity Indices for International Comparisons

knitr::opts_chunk$set(
  collapse = TRUE,
  comment = "#>"
)

library(pppindexr)

Peter Neary published an important paper in the AER (2004) comparing different approaches to calculating real income indices using the 1980 International Comparison Project (ICP) data -- the same data used in the Penn World Table (PWT). Neary proposes an improvement on the PWT use of the Geary-Khamis method for calculating real income. I use Neary's data to illustrate how to use the functions I provide.

The data and implied indices

Neary uses a set of 11 goods for 60 countries. I have assembled his data into the Neary2004 data set available with the pppindexr package. In addition to prices and "quantites" (expenditure at US prices), there are country names and population, all for the ICP baseline year 1980.

I can use the implemented quantity index functions to add the indices to the data. I scale all observations in the minimum (Ethiopia), the same way that Neary does for his Table 1 and Figure 1.

First I extract the price and quantity matrices (or, in fact, dataframes):

P <- Neary2004[, c("p1","p2","p3","p4","p5","p6","p7","p8","p9","p10","p11")]
Q <- Neary2004[, c("q1","q2","q3","q4","q5","q6","q7","q8","q9","q10","q11")]

Then I add the indices to the Neary2004 dataset. I enter two different Geary-Khamis numbers: one with and one without weighting by population size.

Neary2004$eks = eks(P,Q)
Neary2004$ccd = ccd(P,Q)
Neary2004$gk =  ygk(P,Q, min_scale = TRUE)
Neary2004$gk_pop =  ygk(P,Q, pop=Neary2004$pop1980, min_scale = TRUE)

Now I list the data to compare it to Table 1 of Neary:

Neary2004[,c("country","eks","ccd","gk","gk_pop")] |> knitr::kable(digits=3)

Inspecting the table, the eks, the ccd, and the gk columns replicate exactly the corresponding columns in Table 1 of Neary (2004), The population weighted Geary Khamis (gk_pop) numbers are slightly different from the ones reported by Neary (gk). This means that Neary calculated Geary-Khamis quantities without population weighting, which I believe is contrary to standard practice - it means that subdividing gdp by region within a country (with uniform within-country prices) will lead to different world prices, and hence also different real income indices.

The Geary Khamis world prices are calculated as follows:

prices <- data.frame(N = 1:11,
                 p_gk = pgk(P,Q),
                 p_gk_pop = pgk(P,Q, pop=Neary2004$pop1980))
prices |>  knitr::kable(digits=3)

References

• Peter J. Neary (2004). "Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income." American Economic Review, 94 (5): 1411-1428. [https://www.aeaweb.org/articles?id=10.1257/0002828043052286]

ErikOSorensen/pppindexr documentation built on Jan. 7, 2023, 4:11 p.m.