Comparisons of prices and real products in Latin America PDF
Preview Comparisons of prices and real products in Latin America
CONTRIBUTIONS TO ECONOMIC ANALYSIS 194 Honorary Editor: J. TINBERGEN Editors: D. W. JORGENSON J. WAELBROECK NORTH-HOLLAND AMSTERDAM •NEWYORK•OXFORD•TOKYO COMPARISONS OF PRICES AND REAL PRODUCTS IN LATIN AMERICA Editedhv J. SALAZAR-CARRILLO Florida International University Miami. U.S.A. and D.S. PRASADA RAO Uni\'ersit}, oj'Ne'A' England Armidale. Australia 1990 ~ORTH-HOLLA~D AMSTERDAM •NEWYORK•OXFORD•TOKYO ELSEVIER SCIE~CE PUBLISHERS B.V. SaraBurgerhartstraat25 P.O. Box 211. 1000AEAmsterdam.The Netherlands Distributorsforthe UnitedStatesandCanada: ELSEVIER SCIE~CE PljBLISHIl'GCOMPAJ'Y INC. 655 AvenueoftheAmericas ~ew York. ~.Y. 10010.U.S.A. Ltbrary of Congress Catalog1ng-tn-Publtcatton Data 2omparlS0ns of p~ices and real products In Latln Amerlca / edlted by J. Sa~azar-Carr' 110 and D.S. Prasada Rao. em. -- <Contributlons to econO~lC analysls ; 194) ~ncludes Index. ISBN 0-444-88409-2 1. PurChasIng power par1ty--Latln Ame~ica. 2. Prlces--Latln Amerlca. 3. G~oss national product--Latln Amerlca. 4. Natlonal lncome--La~ln Amerlca. I. Salazar-Carr11lo. Jorge. II. Prasada Rae. D. S. III. Serles. HG3821.C72 1990 338.5'2'098--d:20 90-43417 CIP ISBN:0444 XH4092 {)ELSEVIER SCIENCEPL:BLISHERS B.V.. 1990 "0 All rights reserved. part of this publication may be reproduced. stored in a retrieval system. or transmitted. in any fortn or by any means. electronic.mechanical. photocopying. recording or otherwise. without the prior written permission of the publisher. Elsevier SciencePublishers B.V./ PhysicalSciencesandEngineeringDivision.P.O. Box 1991. 1000BZAmsterdam.TheNetherlands. Special regulations for readers in the L".S.A. - This publication has been registered with the Copyright Clearance Center Inc. (CCC). Salem. Massachusetts. Information can be obtained from the CCC about conditions under which photocopies ofpartsofthis publication may be made in the U.S.A. All other copyright questions. including photocopying outside of the U.S.A.. should be referredtothe publisher. ElsevierSciencePublishersB.V.• unlessotherwisespecified. t"o responsibility isassumed by the publisherforany injuryand/ordamage to personsorpropertyas a matterofprodu<.:ts liability. negligenceorotherwise.orfrom any use oroperationofany methods. products. inslructionsorideascontainedin thematerial herein. p.p. 167-228.335-348.349-364:Copyright not transferred. PRlf\TEDI~ THEl':ETHERLANDS INTRODUCTION TO THE SERIES This series consists of a number of hitherto unpubHshed studies, which are intro duced by the editors in the behef that they represent fresh contributions to economic science. The term "economic analysis'' as used in the title of the series has been adopted because il covers both the activities of the theoretical economist and the research worker. Although the analytical methods used by the various contributors are not the same, they are nevertheless conditioned by the common origin of their studies, namely theoretical problems encountered in practical research. Since for this reason, busi ness cycle research and national accounting, research work on behalf of economic policy, and problems of planning are the main sources of the subjects dealt with, they necessarily determine the manner of approach adopted by the authors. Their methods tend to be "practical" in the sense of not being too far remote from appli cation to actual economic conditions. In additon they are quantitative. It is the hope of the editors that the publication of these studies will help to stimulate the exchange of scientific information and to reinforce international cooperation in the field of economics. The Editors Vll LIST OF CONTRIBUTORS AQUILES ARELLANO Economic Commission for Latin America, Chile IRMA Τ. DE ALONSO Florida International University, U.S.A. ANGELD JORGE DE SOUZA Brazilian Institute of Economics, Brazil ANDRE HOFMAN University of Groningen, The Netherlands RICARDO LIRA Catholic University, Chile ANGUS MADDISON University of Groningen, The Netherlands CAMILO MICHALKA Getulio Vergas Foundation, Brazil FRANK ORLANDO Inter-American Development Bank, U.S.A. DIRK PILAT University of Groningen, The Netherlands D.S. PRASADA RAO University of New England, Australia JORGE SALAZAR-CARRILLO Florida International University, U.S.A. W.F. SHEPHERD Griffith University, Australia IX EDITORS' INTRODUCTION In the last decade, the inadequacy of exchange rates for international com parisons of income, product and other values has become widely recognized. Exchange rates are determined by all transactions in the external sector and are utilized by governments as policy instruments. They only conditionally reflect, therefore, diff^erences in the levels and structures of prices among countries. The variability of exchange rates in the international monetary scene dramatically illustrates this point. If we utilize exchange rates for income and product comparisons, the results would fluctuate substantially over short periods of time. The concept of purchasing power parities was developed to overcome the inadequacy of exchange rates for international comparisons. Purchasing power parities are indices of price relatives among countries, calculated on the basis of goods and services which are representative of national income or product. Use of these parities, instead of exchange rates, results in more precise income and product comparisons. International comparisons are utihzed by various organizations in their operations, research and pubhcations. The World Bank and the Inter- American Development Bank, for example, design their lending and tech nical cooperation programs after careful evaluation of socio-economic statis tics. One comparative statistic, per capita income, is ubiquitously cited as an important indicator of relative economic development, and is used to help determine a country's access to and terms of various loans. To ob tain accurate measurements, purchasing power parities should be utilized to express national income and product per capita. This book contains studies related to the computation of purchasing power parities for comparing real income and product among Latin Amer ican countries. The principal components of income and product com parisons are discussed: from designing and executing benchmark studies, to extrapolating results for non-benchmark years. Diff^erent comparative methods and measurement techniques, including index number formula tions, are considered. Comparisons of Latin countries with other countries χ Editors^ Introduction are also undertaken. It is our hope that this volume will help illundnate the thorny theoretical and methodological issues involved in regional comparisons, and to facilitate the practical application of the comparative approach to the many sided policy problems generated by a rapidly integrating international economy. We wish to thank Duongkamon Chotikapanich, Sue Nano, Visala Rao and Guang Hua Wan for their help in the preparation of the manuscript. In particular, assisstance of Chotikapanich and Hua Wan with Latex is gratefully acknowledged. Jorge Salazar-Carrillo D.S. Prasada Rao Comparisons of Prices and Real Products in Latin America J. Salazar-Carrillo and D.S. Prasada Rao (Editors) © Elsevier Science Publishers B.V. (North-Holland), 1990 OVERVIEW Jorge SALAZAR-CARRILLO and D.S. Prasada RAO Comparisons of prices, purchasing power of currencies, products and income have been undertaken in Latin America since the middle fifties. Prompted by a need to study the interactions between inflation, change in exchange rates and economic development in the various Latin Ameri can and Caribbean countries, the Economic Commission for Latin Amer ica (ECLA) spearheaded this work. Although Raul Prebisch, the Exec utive Secretary of ECLA and his distinguished colleagues strongly sup ported the research, it was the Head of Statistics at the institution, statis tician/economist, Stanely Braithwaite, who took responsibility for the stud ies. Even though a large theoretical and empirical borrowing from similar efforts applying to a small subset of Organization of Economic Cooperation and Development (OECD) nations took place, many of the characteristics of the ECLA investigation remained unique. Even though the results of the original Latin American and Caribbean studies were quite fruitful for rational analyses, and also for the drive to wards economic integration in the region which were in full force during the early sixties, ECLA could not continue with the undertaking. At that time a cooperative network of research institutions had just been formed. They were known by the Spanish acronym ECIEL, which mean. Joint Studies for the Economic Integration of Latin America. Until the early eighties the Group devoted itself to this and other basic research eff^orts on eco nomic development and integration in Latin America and the Caribbean. The direction of the comparisons of price levels and structures, purchasing power parities and exchange rates, and real income, products and pro ductivity in the region and with the rest of the world, was entrusted to economist/statistician Jorge Salazar-Carrillo. During this stage these stud ies reached a level of sophistication and innovation which placed the ECIEL 2 Salazar-Carrillo and Prasada Rao undertakings in these areas at the frontier of theoretical and methodological development. From that juncture onwards, progress has only been accom plished in comparing subsets of countries and/or sectors in Latin America and the Caribbean. This explains why many of the references in this book reflect the era in which the pinnacle of achievements in the Latin Ameri can and Caribbean comparisons was reached, and which the book mostly reflects. This volume is divided into four parts, each part consisting of a set of papers discussing a particular aspect of the main theme of the book. Part I of the volume provides an overview of the methodological issues underlying the comparisons among Latin American countries. This part also provides some empirical results from such attempts, the latest being a study focusing on the countries in the Central American region. Part II deals with some of the theoretical issues concerning the index number methods that are used in deriving the purchasing power parities at the aggregate level. Part III examines some of the methodological issues involved in the use of index number methods with the price and quantity data that are generally used in such comparisons. This part contains papers that provide guidelines for the collection of data and papers that deal with necessary econometric techniques that are required in the intermediate analysis of the price and quantity data. The last part of this volume consists of papers that deal with comparisons of sectoral aggregates across Latin American comparisons. In particular three papers dealing with the comparisons of agriculture and manufacturing sectoral aggregates and productivities are included. According to the author of the first chapter, comparative information about the economic conditions of Latin American countries is needed if the problems and potentialities of each country are to be assessed. Without the homogeneity of economic data, the possibility of economic integration in Latin America, despite its importance to the development of the area, could not be fully achieved. In this chapter, methods for developing such data are examined. They are: comparison of the Gross Domestic Products (GDPs) in real terms; estimation of the Purchasing Power Parities (PPPs) and comparison of price levels. Each method presents difficulties, such as the limited number of categories reported in the national accounts, the problem in selecting a basket of goods that is representative for interspatial comparisons or the influence that variations in the conversion factors can exert on value comparisons. Overview 3 In order to avoid, or at least minimize some of these problems, specific methodological aspects are suggested, and detailed study procedures are presented, for the collection of data, data processing, the determination of expenditure weights and price adjustments for such broad items as private consumption, public consumption and capital formation, and their break down into smaller categories. The study also examines the appUcabiUty of the Walsh, Lasapeyres and Fisher indices to specific purposes, such as multinational or binary com parisons. Data are then presented for selected countries and regions. In the Appendix, we find a rich source of details utiUzed in the study, such as the classifications used for grouping expenditure and price data; lists of products included in private consumption; as well as survey instructions for the collection of price and value data in the private consumption, capital formation and pubUc consumption categories. In the next chapter comparisons of real products, purchasing power par ities and price levels in Latin America, for private and pubUc consumption and investment, as well as gross domestic product, are presented, and some analytical conclusions are derived. Results from the three main attempts to compare national income aggregates among Latin American countries for the years 1973 and 1979 are included in this paper. The Chapter by Salazar-Carrillo and Alonzo documents the results from a most recent study involving a small group of countries from the Central American region. Re- sidts based on methods other than the Walsh method are also presented. The first part concludes with a short paper by Salazar-Carrillo on indirect taxation, tariff and price relatives in Central America. Two hypotheses are presented in this paper concerning the eff'ect of taxation and tariffs on prices and their comparison in the Central American Common Market. These hypotheses, tested by using regression analysis, were that no signif icant differences among the countries involved in the effect of such policy measures over prices exist, and that it does not matter that tariffs and taxes may have a major impact in one country's prices and a minor one in another. The results suggested that there was a significant relationship be tween the price relatives and the levels of indirect taxation across countries, while there is none between such price levels and tariffs. The Part II consists of papers dealing with theoretical issues concern ing the index number methods for multilateral comparisons which form the basis for the inter-country comparisons of the national income aggregates.
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