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There are large differences between rich and poor people in the world. This is of major concern to economists, as well as to the public. Consequently, two major questions arise. First, how large are the differences between rich and poor, and second, do the differences get smaller or larger; i.e., do incomes diverge or converge across people and across countries?

The answers depend on the measures used for comparisons. To illustrate, (per capita) income in China is six times larger if one uses Penn World Table (PWT) incomes rather than exchange rate based incomes (EX income).

In this paper, Almås studies PWT incomes and estimate the bias in them by using Engel curves for food.1 Furthermore, the relationship between the bias and the real income of a country is studied. Because the PWT produces purchasing power parity (PPP) adjusted incomes, the associated bias is referred to as the PPP bias. Having estimated the bias in PWT real incomes, we provide new estimates of real income. By comparing the estimated real incomes and the PWT incomes, the issue of how the bias influences estimated inequality and convergence is discussed. In addition, we discuss whether EX incomes provide better estimates of real income than do PWT incomes.

Article in pdf format

Ingvild Almås is assistant professor at the Norwegian School of Economics and Business Administration.