Accounting for Unrepresentative Products and Urban-Rural Price Differences in International Comparisons of Real Income: An Application to the Asia-Pacific Region

Abstract

The International Comparisons Program (ICP) run by the World Bank compares the purchasing power of currencies and real income across countries. Using a unique data set consisting of over 600,000 ICP price quotes drawn from nine countries in the Asia-Pacific region, we consider a number of ways of improving the basic heading price indexes that form the building blocks of ICP. In particular, we show how the results can be adjusted to take account of unrepresentative products, urban-rural price differences and differing outlet-type mixes across countries. We also consider the plausibility of the most striking result that emerged from ICP 2005 -- that China came out 40 percent smaller than previously thought. Our results suggest that part of this discrepancy can be attributed to excessive sampling in China of unrepresentative products in urban locations.

Keywords: International Comparisons Program, Country-Product-Dummy Method, Price Index, Rural-Urban Price Differences, Representative and Unrepresentative Products, Shopping Outlet, China

JEL Classification: C43, E01, E31, O47, O53