PPPs: Purchasing Power or Producing Power Parities?

This paper examines the different types of deflators that are used to compare volume estimates of national income and production across countries. It argues that these deflators need to be tailored to the specific income concept used for study. If the potential to spend concept is employed, a purchasing power deflator is needed. If a production based concept is used, a producing power deflator is necessary. The paper argues that present practice produces a hybrid deflator that fails both purposes when terms of trade shifts are large and offers a solution.