Analysing Convergence with a Multi-Country Computable General Equilibrium Model: PPP versus Mer

Abstract

In studies of the greenhouse gas implications of convergence by developing countries to the per-capita GNPs of developed countries, considerable discussion has centred on whether purchasing power parity (PPP) or market exchange rates (MER) should be used in measuring per-capita GNPs. We suggest that technology gaps between developing and developed countries should be the starting point for convergence analysis rather than per-capita GNP gaps. We estimate two sets of initial technology gaps, using PPP and MER price assumptions combined with input-output data. In simulating the effects of closing technology gaps (convergence) using a dynamic, multi-country CGE model, we find:

the MER/PPP distinction matters. MER-based estimates of initial technology gaps lead to higher estimates of convergence-induced growth in greenhouse-gas-emitting industries in developing countries than do PPP-based estimates.

the industry detail in CGE models is valuable. Our simulations show a wide range of convergence-induced changes in output across industries.

Keywords

convergence greenhouse gas emissions technology purchasing power parity market exchange rates dynamic general equilibrium modelling

Get full access to this article

View all access options for this article.

References

Castles

and Henderson

(2003a), “The IPC Emission Scenarios: An Economic Statistical Critique”, Energy and Environment, 14 (2&3): 159–185.

Castles

and Henderson

(2003b), “Economics, Emission Scenarios and the Work of the IPCC”, Energy and Environment, 14 (4): 415–435.

IPCC (2000), Emissions scenarios, special report of the Intergovernmental Panel on Climate Change, Nakicenovic

Nebojsa

and Swart

Rob

(eds.), Cambridge University Press, UK.

Holtsmark

B.J.

and Alfsen

K.H.

(2004), “PPP-correction of the IPCC emission scenarios -does it matter?”, Discussion Paper No. 366, Statistics Norway, Research Department, February, pp. 13.

Nordhaus

(2005), “Alternative Measures of Output in Global Economic-Environmental Models: Purchasing Power Parity or Market Exchange Rates”, Paper prepared for the IPCC Expert Meeting on Emission Scenarios, U.S.-EPA, Washington DC, January 12–14, revised February 8, pp. 39.

Mai

Y-H

and Horridge

(2003), “Modelling the Potential Benefits of an Australia-China Free Trade Agreement”, final report from the Centre of Policy Studies to the Economic Analytical Unit, Department of Foreign Affairs and Trade, available from the Centre of Policy Studies, Monash University, pp. 25.

Hertel

T.W.

, editor, (1997), Global Trade Analysis: Modelling and Applications, Cambridge University Press, Cambridge, U.K.

Balassa

(1964), “The Purchasing-Power Parity Doctrine: A Reappraisal”, The Journal of Political Economy, Vol. 72(6), December, pp. 584–596.

McKibbin

W.J.

Pearce

and Stegman

(2004a), “Long run projections for climate change scenarios”, Working Paper in International Economics, No. 1.04, Lowy Institute for International Policy, May, pp. 66.

10.

McKibbin

W.J.

Pearce

and Stegman

(2004b), “Can the IPCC SRES be Improved”, Energy and Environment, Vol. 15(3), July, pp. 351–362.

11.

Manne

A.S.

and Richels

R.G.

(2003), “Market Exchange Rates or Purchasing Power Parity: Does the Choice Make a Difference to the Climate Debate?”, Climatic Change, Vol. 71(1), July, pp. 1–8.

12.

Tol

R.S.J.

(2005), “Exchange rates and climate change: An application of FUND”, Climatic Change (forthcoming).

13.

Dimaranan

B.V.

and McDougall

. (2002), Global Trade, Assistance and Production: The GTAP 5 Data Base, Centre for Global Trade Analysis, Purdue University.

14.

Dixon

. and Rimmer

M.T.

(2005), “The convergence hypothesis in the context of multicountry computable general equilibrium modelling”, paper presented at the 8^th Annual Conference on Global Economic Analysis, Lübeck, Germany, June, pp. 43.

15.

Young

Alwyn

(1992), “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore”, NBER Macroeconomics Annual, MIT Press, Cambridge Massachusetts, pp. 13–63.

16.

Krugman

Paul

(1994), “The Myth of Asia's Mracle”, Foreign Affairs, Vol. 73 (6), published by the Council of Public Relations.