International Relative Price Levels: A Look Under the Hood
30 Pages Posted: 18 Sep 2012
Date Written: August 5, 2012
This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank’s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.
Keywords: International comparison program, purchasing power parity, competitiveness, Penn Effect, real effective exchange rates, tradability
JEL Classification: F41, F43
Suggested Citation: Suggested Citation