PPPs for SDRs? Some theoretical observations on how to normalise,capture the dynamics,and extend the application of,global purchasing power parities

Abstract

The World Bank's International Comparison Project (ICP) takes the United States as base country for normalising purchasing power parities between countries over space, and over time. The rule is being followed on the assumption that the particular choice is arbitrary, as well as irrelevant for the results, as it only fixes a numeraire for the Geary-Khamis index.

The paper contests this assumption. It shows, by means of a simple example, how substituting a different base country may alter figures and rankings of countries' GDP, and it recommends a neutral standard of measurement to apply, instead. On this basis, the paper also sketches a vision of how the Geary-Khamis index may naturally be extended to form the mathematical underpinning of a full, and coherent system of accounting for world growth and world inflation, together.