Online Prices for Computing Standards of Living Across Countries (OPSLAC)

University Of California-Davis, Davis CA

Investigators

Abstract

Comparison of economic progress across countries requires that calculation across countries of real gross domestic product (GDP) in a common currency, i.e. U.S. dollars. The calculation of real GDP per capita, which is made by the World Bank, is much the same as the calculation needed to obtain an extreme poverty line of $1.90 per day: both calculations must convert spending in a local currency into spending in U.S. dollars. Nominal exchange rates cannot be used for this purpose because they do not take into account the price levels existing in each country. In particular, converting the spending in developing countries into U.S. dollars with nominal exchange rates makes poor counties appear even poorer and rich countries even richer. Instead, it is essential to correct for the lower prices found in poor countries as compared to rich countries. This project studies the feasibility of using "Big Data" methods and online prices to convert spending across countries into a common currency (U.S. dollars), and to establish extreme poverty lines in a common currency (e.g. $1.90 per day). The source of internet price data is the Billion Prices Project (BPP), an academic initiative associated with Alberto Cavallo, one of the principal investigators. The BPP has access to global price information at a very fine level of detail, as is essential in order to compare price for the same goods (e.g. Arabica coffee beans) across countries. These online prices have the potential to improve both the frequency and accuracy of price observations in comparison to traditional price data collection methods, For example, the World Bank currently engages in a labor-intensive collection of prices across countries in what is called the International Comparisons Project (ICP). Because it involves actual visits to stores in so many countries, the ICP can collect prices only at infrequent intervals (the most recent years were 2005 and 2011, with another collection planned for 2017). Furthermore, traditional data collection methods require the cooperation of local statistical agencies and their adherence to strict quality and methodological standards that are often impossible to control. The results will be valuable for the World Bank and other international agencies engaged in measuring real GDP and extreme poverty; for policy-makers that rely on accuracy of these measurements to design and implement solutions; for the work of academics engaged in the Penn World Tables and related international comparison databases; and for scholars from Economics, Political Science, and other disciplines who rely on the measurement of real GDP in various countries. The main goals of this project are to: a) utilize "Big Data" internet sources from the Billion Prices Project to obtain a database of average online prices for comparable products across countries that is independent of the methods used to collect prices by the World Bank; b) to use this online price information to construct measures of the standard of living across countries that can be compared to those from the World Bank, but which will potentially differ due to the new sources of price data; and c) do this at a monthly frequency, rather than once every 6 years, to more accurately track and pinpoint changes in prices and living standards. Large-scale micro-price data from various sources (government surveys, scanner datasets, or web-scraped online sources) have become available for researchers in recent years, but they are not yet suited for comparing prices across countries because prices are not collected according to the same classification or identification system and use differing price collection methods can invalidate international comparisons. The approach will be to access the large-scale, multi-country dataset of prices available at the BPP, build a standardized method for matching products across countries, and develop an appropriate methodology to scale up from individual product prices to an overall consumer price comparison. The project will focus on key practical and methodological issues and lay the groundwork for the use of online price data in research applications that make cost-of-living comparisons across countries. The research will be published in academic papers and the researchers will also publish a monthly database of average price levels in various countries computed during the duration of the project. The investigators will share this database publicly with other researchers via data depositories such as the Harvard/MIT Dataverse. The website of the Penn World Table (www.ggdc.net/pwt) will also provide a platform for disseminating the results from integrating online price information with other macroeconomic data series. This award was made as part of Round 4 of the Digging Into Data Challenge, an international funding opportunity designed to foster research collaboration across countries and to encourage innovative approaches to analyzing large data sets in the social sciences and humanities. The U.S based researchers will collaborate with scholars in Canada and the Netherlands to achieve the goals of this project.