Short‐Cut Estimates Of Real Income

The United Nations International Comparisons Project (ICP) has conducted in‐depth purchasing‐power parity (PPP) studies of the so‐called “benchmark” countries (of which there were 34 in the 1975 sample). In the absence of PPP studies of the rest of the countries in the world, the ICP team has constructed “short‐cut” estimates of real income (that is, income converted from domestic currency to dollars at PPP) for the nonbenchmark countries. The idea of a “short‐cut” procedure for estimating real income is to run a regression of real income on nominal income (that is, income converted from domestic currency to dollars at a market exchange rate) and other variables among the benchmark countries and then to use this regression to estimate real income for the nonbenchmark countries. The most recent ICP short‐cut estimates have been based on regressions of real income on nominal income and the foreign trade ratio. The present study expands the list of candidate variables that might be included in a short‐cut regression. The list includes educational attainments, the share of minerals in GDP, the trade balance, the growth of the money supply, tourist receipts, and the share of nontradables in GDP. The theory underlying the inclusion of each of these variables is discussed. Regressions are run with various combinations of these variables and some short‐cut estimates of real income for 76 market economies are presented.