One area of our research promises to make a major contribution to conceptual and methodological problems in the use of unit values to make price and purchasing power parity (PPP) comparisons across countries. International trade and production data are often used to approximate prices by dividing values of categories produced, exported or imported by their respective quantities. The quantities themselves are at a fairly detailed level but still are heterogeneous, often combing say, pumps of different capacities and/or different qualities into one quantity. The conceptual issue is we do not know if the prices may be lower in some countries because of the mix of items in the quantity and/or the lower quality of the goods. The research tackles this problem for trade data by simultaneously looking at the demand and supply of higher quality items by country using detailed customs data. Preliminary results developed by the Center for International Data at the University of California/Davis suggest this is an exciting approach to a problem that is fundamental to the use of unit value trade data. In addition, the underlying data sets will be of value to researchers in the area.
Another very important direction of this research is related to the integration of production and expenditure side estimates on a consistent basis using PPPs. Up until now expenditure side comparisons, which are simpler to carry out, cover over 180 countries for some or all the years 1950 to 2004 as part of the Penn World Table (PWT). However, these estimates only allow approximate comparisons of productivity at the GDP level, whereas most interest attaches to sectors like retail trade, IT, and the like. At the GDP level, the adjustments of the terms of trade that flow from the unit value research described above permit very much improved estimates of aggregate production across countries. Comparisons of productive sectors have been carried out by Groningen Growth and Development Center (GGDC) for a significant number of countries. It is our goal to link the GGDC estimates to those of as many countries as possible in PWT, which would be a major contribution both methodologically as well as for comparisons of productivity across countries, thereby giving this project a major global research impact.
As the above research progresses we hope to formulate a further closing of the circle between trade, expenditure and production flows in international comparisons. A major hurdle here is that the prices of goods entering international trade of a country are often quite different from the prices of goods produced in a country. So even if one has solved the quality program across countries in terms of comparing prices of exports and imports, this will not necessarily produce the same comparison between two countries as would a comparison of domestic production. A country like China, which exports a variety of high quality products, also produces domestic versions of those items of lower quality and different mix. This important issue will be a major subject of the workshops planned as part of this project.
The latest detailed benchmark International Comparison Project (ICP) comparisons for 2005 are being coordinated by the World Bank. Integration of these estimates into PWT will be part of a major upgrade of this widely-used data set. It will be an opportunity to introduce a number of methodological changes that have emerged as part of ongoing research, some by members of our collaborative project, some by independent researchers, and some developed in conjunction with the preparation of an ICP handbook.
