International Relative Price Levels: An Empirical Analysis
Charles P. Thomas, Jaime Marquez, James Coonan, Corinne Land
Division of International Finance, Federal Reserve Board, Washington, DC, United States

This paper characterizes the structure of international relative price levels using cross-section and time-series data. The cross-sectional data consist of the 2005 benchmark purchasing power parities of the International Comparison Program (ICP) for 146 countries with 155 basic headings. These benchmarks embody methodological improvements enhancing product comparability and are the first to include actual price observations for China. With the above micro data, we offer a new perspective on measuring international competitiveness that might be of interest to open-economy macro. Specifically, access to disaggregated data allows us to tailor the basket of prices, and hence the measure of competitiveness, to alternative questions. Our focus is on the various definitions of “tradable” and “non-tradable” products and on their role in quantifying a country's international competitiveness.

The time series data consist of the purchasing power parities reported by the World Development Indicators. We use these data to measure U.S. bilateral relative price levels for 34 countries from 1980 to 2007. Further, we aggregate these bilateral relative prices with time-varying trade weights to obtain a country's international relative price level. With these data, we examine whether movements in international relative prices based on our measure are comparable to those of existing REERs.

Our analysis leads to several findings. First, the median of the distributions of relative prices of non-tradable products is generally higher than the median of the distribution for tradable products. Second, the dispersion of relative prices is considerably smaller for tradable than for non-tradable basic headings. Finally, depictions of price movements based on our international relative prices are fundamentally different from those based on existing REERs. We trace these differences to our emphasis on aggregating relative price levels instead their growth rates.

Keywords: Purchasing power parity; ICP; United States; Real effective exchange rates

Biography: Received PhD in Economics from the University of Pennsylvania in 1983.

Works for the Board of Governors of the Federal Reserve System, since 1983.

Serves as an adjunct professor in the School of Advanced International Studies – Johns Hopkins University, since 1990