Is There a Rule of Thumb for Absolute Purchasing Power Parity to Hold?

Abstract

The validity of absolute purchasing power parity (APPP) between the pairs of 55 representative countries, along with their pooled data, is examined empirically. A rule of thumb for the validity of APPP is tentatively proposed. That is, for a pair of countries for which the Penn effect exists and the GDP per capita of one country is less than half of that of the other (meaning that their income levels are very different), it is very likely that APPP does not hold; however, if the GDP per capita of one country is greater than half of the other’s (meaning that their income levels are close), there is a certain possibility that APPP holds.

Keywords: Absolute purchasing power parity; Penn effect; rule of thumb

JEL Classification: F30, F31