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Measurement of Global Growth , Inflation, Inequality and Poverty

This seminar explores the measurement of global growth, inflation, inequality, and poverty. It provides a conceptual framework, methodology, and results for these measures, offering numerical illustrations and insights.

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Measurement of Global Growth , Inflation, Inequality and Poverty

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  1. Measurement of Global Growth, Inflation, Inequality and Poverty D.S. Prasada Rao The University of Queensland Brisbane, Australia

  2. Background • Performance of the world economy is of considerable importance • Measures of growth of the world economy are regularly published • IMF (2017), World Economic Outlook, confirmed global growth at 3.1% in PPP terms; 2.4% in market exchange rates (MER) • UN (2016) reports growth rate of 2.9% growth in 2015 and a projected rate of 3.2% in 2017 • Price-Waterhouse-Coopers (PWC) reported global growth in 2016 of 3.0% in PPP terms and 2.9% in MER • Morgan Stanley (2017) reports a projected growth rate of 3.4% in 2017 • Measures of global inflation are also reported in international press • UN (2016) reports global consumer inflation of 2.6% • PWC (2016) reports global inflation of 2.6% and 1.9% in PPP and exchange rate terms

  3. Questions? • How are these growth rates measured? • What is meant by in PPP terms and in MERs? • Do they refer to a notion of the world economy? • If so, how do they relate to it? • Growth rates as weighted average of country-specific growth rates • What weights to be used – base period or current weights? • Arithmetic or geometric averages? • Measures of global inflation • How are these measured? • Do they relate to global growth estimates? • Do they refer to consumer inflation or GDP related inflation We (Rao, Rambaldi and Balk) provide answers to these questions – presented in this seminar

  4. Outline • Measuring global growth and inflation • Conceptual Framework • Methodology • Results • Measuring Global Inequality and poverty • Main steps involved in global inequality and poverty estimation • Estimates of global poverty and inequality

  5. Measures of Global Growth and Inflation

  6. Numerical illustration We consider the 2005 and 2011 ICP benchmarks and the computations cover 141 countries for which we have deflators and other necessary data. Countries are divided into ICP regions: Africa, Asia-Pacific, CIS, OECD-Eurostat, etc. We compute regional and global inflation rates over the period 2005 and 2011 using the methodology described in this paper. Decompositions are based on Fisher and and Sato-Vartia indexes

  7. Size of the World EconomyGlobal GDP in current prices (dollars) Total real GDP (in PPPs) in periods s and t is given by Total nominal GDP (in XRs) in periods s and t is given by We note that these two aggregates are in the prices of periods s and t respectively. Therefore these are labelled as in current prices.

  8. Real and Nominal World and Regional GDP(in billions of US dollars – current prices) Source: World Bank, Results from ICP 2005 and 2011. Growth in World Economy from 2005 to 2011 Real GDP in PPPs - 1.6489 Nominal GDP in XR’s - 1.5865

  9. PPP Normalisation • PPPs are always presented relative to a “reference currency. • US dollar is generally used as reference currency. In this case, US Price Level = 1 (or 100) • PPPs can be normalised so that real and nominal GDP for the world are equal – in this case World Price level = 1 (or 100)

  10. PPPs from ICP 2011(selected countries) Source: World Bank, 2014, Results from ICP 2011.

  11. World Economy in PPP and XR terms • We note that change in world GDP in PPP terms (in current prices) over the period 2005 to 2011 is different from the change measured in exchange rates. • This is likely to cause a lot of confusion among users • Is it possible to synchronise these two measures • PPPs and exchange rates are all expressed relative to US dollars. • US dollar is used as the numeraire or reference currency as PPPs are determined up to a factor of proportionality • In our paper we propose a normalization for PPPs which ensures that world GDP in any given year would be the same in PPP and exchange rate terms • In simple terms, this means adjusting all PPPs using a constant that equals the ratio of world GDP in PPP and Exchange rate terms • This is the approach we use in rest of this paper

  12. Global Inflation and Growthat the country level We start with the decomposition of changes in GDP at the country level over time – this serves as a template for the world economy. GDP deflator GDP growth

  13. Global Inflation and Growth The objective is todecompose the total real GDP ratio into a price index and a quantity index, . • We need to find formulae that satisfy this equation leading to measures of world growth and inflation in PPP terms. • Similar expressions are derived in the paper for measures based on exchange rates. • The growth and inflation measures on the right hand side can be direct or can be chained. • We use symetric decompositions – symmetric with respect to the base and current periods.

  14. Fisher-type Decomposition In deriving this decomposition, we make use of the following standard index number result The main trick is to express our problem in a form where this result can be used.

  15. Laspeyres-type Decomposition We make use of the first equality on the RHS of value change decomposition. Weighted harmonic price change adjusted for PPP changes – weights are current period shares Weighted arithmetic mean of country specific growth rates – based period share of the country in the world

  16. Paasche-type Decomposition We make use of the second equality on the RHS of value change decomposition. Weighted arithmetic mean of country specific inflation rates adjusted for PPP changes – based period share of the country in the world Weighted harmonic of country-specific growth rates – current period share of the country in the world

  17. Fisher-type Decomposition Since the Laspeyres and Paasche decompositions make use of base and current period country shares, a symmetric decomposition is given by taking geometric average. This gives measures of global growth and inflation as:

  18. Global Inflation and Growth • The Fisher global growth shows that it is important to make use of country-specific shares in the global economy in both periods. • Global inflation estimates rely both on domestic inflation as well as PPPs in both periods. • This measure differs from the formula given in Diewert (2014). • We can derive global inflation and growth estimates based on exchange rates. Then we have:

  19. Global Inflation and Growth - Sato-Vartia-type Measures • Using the logarithmic mean, the ratio on the left can be written as a sum on the right hand side. • where

  20. Sato-Vartia-type Measures • Then the World Inflation and World growth can be measured using: The global growth and inflation are given by: Price change PPP change

  21. Global Inflation and Growth – 2005 to 2011 Source: Rao, Rambaldi and Balk (2015) We normalize so that nominal GDP growth and growth in real GDP at current prices is equal.

  22. Decomposition of Global Inflation

  23. Measures of Global Inequality and Poverty

  24. Three types of inequality Type 1: Inter-country inequality • Inequality in real per capita income • Each country is treated as one individual • Decomposition into within-region and between-region inequality Type 2: International inequality • Inequality measure which is based on the use of population weights • Each country is represented by the population size and average incomes Type 3: World or Global inequality • A more complete measure that takes into account per capita income, population size and inequality within each country • The first and second types ignore “inequality within each country” These three measures of inequality are based on real per capita incomes – incomes converted using PPPs

  25. Trends in inequality: Concepts 1, 2 and 3 Source: Milanovic 2013, 2016

  26. Population weighted Gini Measure of International Inequality Source: Milanovic (2002, 2009)

  27. Global Distribution of Income: 2005, 2011 Source: World Bank, Results from ICP 2005 and 2011.

  28. Derivation of Regional and Global income distributions Stage 1: Fit an income distribution for each country included in the analysis population • - Choose a parametric representation for the distribution • - Estimate parameters using observed data Stage 2: Combine income distributions of countries belonging to a regional to make up regional or global income distributions. Stage 3: Derive the global and regional Lorenz curves and measures of inequality.

  29. Data for fitting country-specific distributions • Method of fitting income distributions is dictated by the characteristics of the data • Unit record data with income data for a large number of individuals or households • In this case maximum likelihood estimation of parameters is possible • Grouped data insufficient for the use of maximum likelihood methods • Grouped data can be in different formats • Income shares of population in different size classes (poorest 10%, next 10%, the richest 10% etc) • - Usually estimates of average income for the whole population are known. • - No information on the bounds of the income intervals • Income shares of population in different income classes with known income intervals

  30. Methodology in recent studies • Milanovic(2002) uses data for 20 income groups • Assumes uniform distribution within each income class • Increased coverage of countries • Sala-i-Martin (2002) uses kernel estimation of country-specific distributions based on decile group data • Not an entirely satisfactory approach given the small number of income groups • Pinkovskiy and Sala-i-Martin (2010) fit lognormal distribution in their paper “Parametric Estimation of the World Distribution of Income” • Our recent research work (JBES, 2007and 2012 and RESTAT, 2012) on fitting more versatile income distributions - Generalised beta-2 and mixtures of lognormal distribution using decile group data – we use generalised method of moments estimation technique.

  31. Data • Material drawn from Warner, Rao, Chotikpanich and Griffiths (2014) • Years covered: 1993, 2000 and 2005 • Income distribution data: • UNU-WIDER dataset • Decile/quintile data • Income distribution data do not refer to the same year. We use a 2-year band. • Real income data are obtained by converting data in national currency units into a common unit using PPPs • We use income series at: • ICP 2005 • PWT 6.3 – 2005 prices and current prices (based on extrapolations from 1993 ICP) • WDI (2007) – World Bank extrapolations from 1993 benchmark • PWT 7.1 – based on extrapolations from 2005 ICP with some corrections for China

  32. Density functions for the world, 1993, 2000 and 2005 Source: Warner, Rao, Griffiths and Chotikapanich, 2014

  33. Global and Regional Distributions, 2005 Source: Warner, Rao, Griffiths and Chotikapanich, 2014

  34. Global Lorenz Curves, 1993, 2000 and 2005 Source: Warner, Rao, Griffiths and Chotikapanich, 2014

  35. Global inequality - trends Source: Warner, Rao, Griffiths and Chotikapanich, 2014

  36. Global inequality between countries – 1960 - 2013

  37. Measurement of Poverty

  38. Poverty Measurement Absolute poverty: Inability to meet basic needs – Lack of income necessary to acquire minimum necessities of life - usually measured using a poverty line - in the international context, $1/day and $2/day are used Relative poverty: Basic on the inability to meet what is expected as basic by the society. “People are poor if their standard of consumption is seriously below what is considered decent in their society so that they are, in effect, excluded from the ordinary of way of life and activities of their community: - For example, poverty lines used here are relative to median income, half or one-third of median income

  39. Poverty Measurement- steps Involved • Specification of Poverty Lines • Absolute Poverty Lines • Relative Poverty Lines • Adjusting poverty lines • Spatial price index numbers • Rural and urban price differences • Spatial price index numbers – sub-national PPPs • Temporal price index numbers • Counting the poor using Household Expenditure Surveys • Poverty incidence – proportion and absolute size • Poverty intensity – Poverty gap • Foster-Greer-Thorbecke (FGT) index, Sen index

  40. Absolute Poverty Line A Household is in poverty if earnings are insufficient to meet “minimum necessities for physical efficiency” • Minimum cost for food, shelter and clothing • Adequate for physical subsistence • These requirements vary from person to person based on: gender, age and level of physical activity. May also depend upon the region • Must reflect the consumption patterns of the society

  41. PPPs and Global Poverty The World Bank Approach • World Bank regularly provides estimates of global poverty. • Uses $1-a day and $2- a day as benchmark poverty lines. • The $-poverty line is converted into local currency using PPPs for Private Consumption • Approach since the 1990 World Development Report. • The current approach is considered deficient because: • PPPs used for converting $1/day poverty line are based on prices of goods and services that are typical of the consumption of the upper income brackets • PPPs are based on expenditure weights that are not representative of the consumption of the poor.

  42. Poverty Lines

  43. PPPs and Global Poverty The World Bank Approach • International poverty line in 1990 based on 1985 ICP PPPs was $1.00 per day • In 1993 the poverty line was updated reflecting new PPPs and set at $1.08 per day. • International poverty line based on 2005 PPPs was $1.25 • The most recent round of ICP has led to a revised poverty line of $1.93 per day • The Atkinson Commission Report (2016) recommended to fix $1.93/day and maintain its real value for global poverty computations for the next 30 years. • Poverty lines of $2/day are also used. • Millennium Development Goal (MDG ) 1 was to halve global poverty by 2015.

  44. International Poverty Lines

  45. Changes in Global Poverty estimates after ICP 2005 Source: Ravallion and Chen (2010)

  46. Global and regional poverty estimates based on ICP 2005 Source: Ravallion and Chen (2010)

  47. Global and regional poverty estimates $1.90 poverty line based on 2011 ICP PPPs These estimates are based on the recommendation of the Atkinson Commission Report in 2016 that $1.90 poverty line based on 2011 ICP be fixed and extrapolated forwards and backwards using domestic CPI. Resulting estimates are: Source: World Bank website, 2017

  48. Thank you!

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