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International Migration, Purchasing Power Parity (PPP) and the Money Metric of Welfare Gains

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  • Timmer, Hans
  • van der Mensbrugghe, Dominique

Abstract

This paper argues that the rise in real global income as a result of migration from low-income countries to high-income countries overestimates the money metric of global welfare gains by at least a factor of two. This is contrary to the analysis of trade policies where the rise in real income, calculated according to national accounting convention, does provide an accurate estimate of the money metric of welfare gains. The complication in migration scenarios arises because the price changes that a migrant experiences, as prices of non-tradable goods differ significantly between the host and home countries, are not represented in the deflators of the host country, but should be taken into account in the money metric of the welfare change of the migrant. Adjustment of real income of migrants using purchasing-powerparity (PPP) adjustment factors provides a good approximation of the money metric of welfare gains. The correct application of the money metric of welfare produces in the case of migration a counterintuitive example of money transfers that increase the money metric of global welfare. Remittances by migrants back to their home country should not be PPP-adjusted, as those who remain in the host country, do not experience a significant change in prices. Because income of new migrants that is not remitted home should be PPP-adjusted, remittances by new migrants increase global welfare.

Suggested Citation

  • Timmer, Hans & van der Mensbrugghe, Dominique, 2006. "International Migration, Purchasing Power Parity (PPP) and the Money Metric of Welfare Gains," Conference papers 331555, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331555
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    References listed on IDEAS

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