Haughton and Khandker
10
4. A U.S. dollar buys fewer goods and services in the United States than a dollar’s worth of dong buys in Vietnam because
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A. Inflation is higher in the United States. B. Nontradable services are cheaper in Vietnam, but the dong-dollar exchange rate is mainly based on the prices of tradable goods. C. Living standards are rising more slowly in Vietnam. D. Vietnam deliberately keeps the dong cheap.
5. In the example set out in table 10.2, suppose that the exchange rate were Rs 50/$ instead of Rs 46/$. Then the value of Indian GDP/capita, using U.S. prices, would be
° ° ° °
A. $1.90. B. $1.75. C. $16.50. D. $2.07.
Until about 2000, World Bank estimates of poverty used estimates of the PPP exchange rates for 1993, based on work done by the International Comparison Project (ICP) run by the United Nations and the University of Pennsylvania (the Penn World Tables). Subsequent estimates augmented these exchange rates with PPP estimates undertaken by the World Bank’s Development Data Group. These estimates all showed a strong “Penn effect”—the observed finding that market exchange rates systematically understate the incomes of less-developed countries. A more ambitious round of PPP computations was undertaken in the 2005 round of the ICP: more countries were covered, including, for the first time, China, and the price comparisons were more extensive and accurate. The most striking result of these recent revisions is that the Penn effect is less pronounced than originally thought. In other words, official exchange rates do not understate less-developed country incomes by as much as had been believed. Some of the effects of the revision are dramatic: using the 2005 ICP data, China’s GDP per capita was $4,091, while previous PPP estimates had put it at $6,750. Given a dollar-denominated poverty line, such as $1.25 a day, and a PPP exchange rate, it is straightforward to compute the poverty line in local currency. Chen and Ravallion (2008) use local consumer price indexes to compute the poverty line in other years. Example: Suppose that the poverty line is $1.25 in 2005, and the PPP exchange rate in that year is 10 pesos/US$. This gives a poverty line of 12.50 pesos in 2005. We can now back into the peso value of the poverty line in 2003 and 2004 using the local consumer price index, as shown in the table at the top of p. 187. 188
The next step is to use household survey data, along with the poverty line, to determine the poverty rate. If, in a given year, there was no such survey, one could