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One of the major criticisms addressed at PPPs is that some per capita real expenditure comparisons are implausible and even counter intuitive at a detailed level. The aim of this short note is to underline that the reliability of the PPP results depends highly on the quality of the national accounts expenditure breakdowns provided by countries and that many of the implausible results are caused by inconsistencies in the expenditure data rather than problems in the price data underlying the PPPs.
The attached table consists of two blocks.
The first block shows for 53 analytical categories the minimum and the maximum per capita expenditures observed among the 28 OECD countries participating in the 1996 Round, converted using exchange rates. The "spread", i.e. the ratio of the minimum to the maximum per capita expenditure, is shown in the third column.
The second block shows for the same 53 analytical categories the minimum and the maximum per capita expenditures observed among the 28 OECD countries participating in the 1996 Round, converted using PPPs. The spread is shown inthe third column.
The spread as it is defined in this note is of course a very rough indicator of dispersion. It is highly dependent on the countries considered in the analysis and is also significantly influenced by extreme values. However, it provides a useful, if rough, summary of the range of estimates in each of the categories. The gap between the minimum and the maximum per capita expenditures can be very wide for a given category, no matter whether exchange rates or PPPs are used. The size of this gap also depends on the type of category considered.
The main point to note is that, when looking at the table and the attached graph (comparing the spread calculated using exchange rates with that calculated using PPPs), it is quite clear that the spread measured using PPPs is lower than the spread measured using exchange rates for all categories. In other words, any category which is identified as having an implausibly wide spread between the lowest and highest per capita consumption on a PPP basis has an even more implausible spread if the comparisons are based on exchange rates rather then PPPs.
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