The price surveys from the latest (2005) International Comparison Program (ICP) imply substantially lower levels of GDP at purchasing power parity (PPP) for many developing countries than prior estimates. In a dramatic example, China's GDP at PPP for 2005 was adjusted downward by 40%. While some observers have questioned the data, this paper argues that the pattern of changes in PPPs between ICP rounds makes sense. Consistently with the original Balassa-Samuelson model, more rapidly growing economies experienced steeper increases in their PPPs relative to market exchange rates. This effect was even stronger for initially-poorer countries. Taking account of this effect would reduce the need for such large data revisions when new ICP data become available.
Keywords: Purchasing power parity; Real exchange rate; Economic growth, China
Biography: MARTIN RAVALLION is Director of the Development Research Group of the World Bank. He has held various positions in the Bank, since he joined as an Economist in 1988. He holds a Ph.D. in economics from the London School of Economics, and has taught economics at L.S.E., Oxford University, the Australian National University, and Princeton University. His main research interests over the last 25 years have concerned poverty and policies for fighting it. He has advised numerous governments and international agencies on this topic, and he has written extensively on this and other subjects in economics, including three books and over 180 papers in scholarly journals and edited volumes. He currently serves on the Editorial Boards of ten economics journals, is a Senior Fellow of the Bureau for Research in Economic Analysis of Development and a Founding Council Member of the Society for the Study of Economic Inequality.