The Empirical Welfare Content of International Price and Income Comparisons

Abstract

Multilateral index numbers are often used to make claims about welfare, such as treating PPPs as cross-country costs of living or real incomes as indicators of living standards. However, such interpretations may not be consistent with the observed data. To study this problem, I derive multilateral bounds on welfare implied by revealed preference and use these to appraise leading comparison methods. My findings support the welfare-interpretability of the contemporary indices I examine, but not of market exchange rates. When using a welfare-consistent multilateral index, the world in 2017 appears larger and more equal vis-\`a-vis the United States than conventional measures.