0119 - Implementing this approach requires data on prices...

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Implementing this approach requires data on prices, to permit comparisons between countries.  International comparisons of economic aggregates have long recognized that market exchange rates which tend to equate  purchasing power in terms of internationally traded goods —are deceptive,  given  that some commodities are not traded; this includes services but also many goods, including some food  staples.  Furthermore, there is likely to be a systematic effect , stemming from the fact that low real wages  in developing countries entail that labor intensive non-traded goods tend to be relatively cheap. In the  literature, this is known as the “Balassa-Samuelson effect ,” and is the now widely-accepted explanation  for an empirical finding known as the “Penn effect”—that GDP comparisons based on market exchange  rates tend to understate the real incomes of developing countries. Similarly, market exchange rates  overstate the extent of poverty in the world. For this reason, global economic measurement, including  poverty measurement, has used Purchasing Power Parity (PPP) rates rather than market exchange  rates. A PPP is the conversion rate for a given currency into a reference currency (invariably the $US)  with the aim of assuring parity in terms of purchasing power over commodities, both internationally traded  and non-traded. Following this approach, Ravallion, Datt and van de Walle (RDV) (1991) (in research done for the  1990 World Development Report) compiled data on national poverty lines across 33 countries and  proposed a poverty line of $1 per day at 1985 PPP as being typical of low-income countries. Using  household surveys for just 22 countries they estimated that one third of the population of the developing  world in 1985 lived below the $1 a day standard. Since then the Bank’s researchers have updated the  original RDV estimates of global poverty measures in the light of new and often better data. The  estimates done for the 2000/01 World Development Report: Attacking Poverty used an international  poverty line of $1.08 a day, at 1993 PPP, based on the original set of national poverty lines in RDV (Chen  and Ravallion, 2001). In 2004, about one in five people in the developing world—slightly less than one  billion people—were deemed to be poor by this standard (Chen and Ravallion, 2007). This was the first  time that the Bank’s global poverty count had fallen below one billion.
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