Comparing the wealth of nations: reference prices and multilateral real income indexes

Abstract

This paper considers the problem of comparing real incomes across countries. The available methods are reviewed and their performance is compared using the raw data underlying the Penn World Table. We propose and implement a test of the "Gerschenkron Effect": the downward bias in a country's measured real income when its own prices are used as weights. The test confirms that this Effect obtains with fixed-weight indexes but not with true bilateral indexes based on empirical demand parameters. We also demonstrate the feasibility of estimating the GAIA ("Geary-Allen International Accounts") System which yields true multilateral real income indexes.