For as long as long as macroeconomics has been a practiced social science, individuals and groups have aggregated data on consumer habits and the cost of living. Development economists routinely index economic data by looking at gross domestic product, gross national income, the consumer price index and purchasing power parity.
Each dataset offers insight into the inner workings of a given economy, helping policymakers and investors understand how money flows in economic sectors. Purchasing power parity data is a unique way to look at the cost of living in a given country by comparing what it costs to feed and house a household in one country to how much it costs to feed and house a household in another country.
Economists examine the cost of doing business and maintaining government in a country by showing price relatives based on a common currency (in practice, the U.S. dollar). Put simply, PPP data gives economists an idea of how much the price of a burger costs in local terms and then compares it to an international standard in order to approximate how much cheaper or more expensive a product or service costs.
The process is extremely complex and PPP data is at best an academic estimate. Back in 2008, for example, the World Bank revised its PPP data on China and found that prices were 40 percent higher in previous predictions. The data revealed that while China still has a significant share of the world’s poor, it has reduced poverty to a greater extent than previously thought, demonstrating the degree of poverty reduction the government helped produce.
Right now, the World Bank is revising the PPP index and the definition of the poverty line, according to the Business Standard. It’s newest formula, applied to India, indicates that India may actually have 75 percent fewer impoverished individuals living on less than $1.25 a day than the 2005 PPP dataset indicated. This means that the World Bank has a clearer picture of what poverty looks like in India, and can therefore better understand poverty’s causes and solutions.
The new PPP data that the World Bank is currently producing is hugely important for clarifying who is actually in poverty, and it can help legislators craft smarter policy decisions as a result. Economic analyses of the cost of living may never be 100 percent accurate, but revising the data helps everyone see a clearer picture of poverty.
– Joseph McAdams
Sources: IMF, NDN, OECD, Site Resources, World Bank
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