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The calculation of high quality PPP statistics requires high quality national accounts and price data for each of the countries for which PPPs are being calculated. Price data are weighted using national accounts data to form PPPs which are then normally divided into national accounts aggregates to convert them to a common currency.
2 Page 9 of International comparisons of real product and purchasing power (Irving B Kravis, Alan Heston, and Robert Summers) - John Hopkins University Press, Baltimore, 1978.
How the biases associated with comparisons of volumes of activity based on exchange rates translate into assessments of changes in inequality is difficult to establish with any precision. It is clear, however, that exchange rates do not provide a suitable starting point for assessing changes over time because they are such a fundamentally flawed means of comparison. Based on exchange rates, the gap in per capita income between the countries with the richest fifth of the world’s population and those with the poorest fifth increased from a factor of 30 to 1 in 1960 to 74 to 1 in 1995. Ian Castles (a former Australian Statistician) pointed out in a report(see footnote 3) criticising the inappropriate use of exchange rates in making international comparisons that, based on PPPs, this ratio was about 12 to 1 in 1960, 18 to 1 in 1990 and 16 to 1 in 1995. The differences observed above in the two sets of time series indicate that per capita volumes based on exchange rates are not able to be used as an indicator of changes over time either, because they are so (implausibly) different from the PPP-based measures. In other words, not only do exchange rate based comparisons produce extreme and meaningless estimates of relative levels but they also produce meaningless results over time. In addition, the table on page 52 which shows the comparison between the USA and Japan based on exchange rates and on PPPs, demonstrates empirically that time series of comparisons based on exchange rates produce results which are economically implausible, even when they are between two high-income countries. In practice, the only certainty with exchange rate based comparisons is that, for any point in time, they will significantly overstate the difference in per capita GDP volumes between high and low income countries. It is impossible to provide a definitive answer to the question of the extent of the change in this bias over time because it will depend on the countries being compared, the extent of the differences in the structure of their economies at each point in the time series under consideration and other factors which affect exchange rates (e.g. financial flows or interest rates).
3 The mismeasurement of nations: A review essay on the Human Development Report 1998 (Ian Castles) - Paper published in the Population and Development Review 24(4), December 1998.