*An Aside on Adjusting PPP for Consumer Substitution
Adjustments are made because otherwise the resulting PPP measure
would essentially assume that relative prices prevailing in the U.S.
(i.e., the numeraire currency) also prevail elsewhere:
The problem: this would imply the resulting total incomes would not
be “base-country invariant”: they would differ if, e.g., conversions
were made to the UK pound sterling).
Accounting for relative price differences recognizes substitutions
people make toward lower-priced goods in their market basket; and
thus gives a more accurate comparison of living standards.
Non-PPP adjusted figures provide a useful indicator of the ability of a
nation to buy goods and services in dollars abroad; but they are
fundamentally misleading regarding the ability to buy domestically.
Sources and details in
Ed, Ch. 2, note 6.