Does World Bank Underestimate the Purchasing Power Parities in Developing Countries--A Measurement Study Based on Modified Balassa-Samuelson Effect

Abstract

Abstract: World Bank published in 2014, the purchasing power parities data of all the countries in the 2011 round of ICP and each country's GDP converted by purchasing power parities. The data shows that the economic aggregate of the developing countries rose sharply compared with that before converted, which raised some doubts about whether their purchasing power parities are systematically underestimated. Through an in-depth analysis of the existing literature on the measurement of the purchasing power parities bias which are not sufficient, this paper works out a method to measure the purchasing power parities bias in underdeveloped regions by taking EU-OECD as a reference system and on the basis of the modified Balassa-Samuelson effect (BS effect) theory. The results show that the purchasing power parities in Asia Pacific, Africa, and west Asia are systematically underestimated by 30%, so that the economic aggregate of these regions is seriously overestimated, which is calculated with purchasing power parities as a currency conversion factor. The main reasons for the underestimation of the purchasing power parities in the underdeveloped regions are as follows: the lower quality of the basic price data, the difficult coordination between the representativeness and comparability of the standard products, and the influence of the expenditure weights in the global aggregation method of purchasing power parities.

Key words: purchasing power parities bias, BS effect, real exchange rate, price level

XIE Chang, CHANG Kun. Does World Bank Underestimate the Purchasing Power Parities in Developing Countries--A Measurement Study Based on Modified Balassa-Samuelson Effect[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2017, 0(1): 15-24.

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