4
$\begingroup$

I'm a little baffled about this: Let's say I want to compare the average income of 2 countries, A and B. Of course I'm interested in the real income so I adjust to PPP using the big mac index of that given year (dividing the average salary by some constant). Now I do it again, but 10 years later (with the big mac index of t = 10).

Question - Can I compare the adjusted average salary of country A, t=0 to the adjusted average salary of country A, t=10?

One can argue that no, because the index used for PPP adjustment changed over time, so we need to take account for this. That's why when you adjust for inflation you have specify to which year the prices have been fixed. You can't compare a real salary adjusted to 2003 prices to a real salary adjusted to 2013 prices.

My logic says yes, because assuming that McDonalds hasn't changed their Big Mac over the past 10 years, the unit of choice remained that same - one delicious burger and it's NOT like adjusting to inflation (in which you have to randomly assign a base year).

$\endgroup$
  • $\begingroup$ Is the answer what you are looking for? If not, let me know. $\endgroup$ – luchonacho Aug 22 '17 at 12:20
  • $\begingroup$ Even if the Big Mac hasn’t changed over time, the social meaning of the Big Mac has. Consider the Big Mac or Play Station PPP commodity bundle index of 1789? $\endgroup$ – Samuel Russell Nov 15 '18 at 2:35
0
$\begingroup$

As you can see from the official dataset, the index changes over time. Therefore, by comparing a variable $x$ in two time periods using a different index for each period, the total change is a combination of changes in the variable $x$ and changes in the index. In other words, you are comparing:

$$ \frac{x_0}{p_0} \text{ versus } \frac{x_{10}}{p_{10}} $$

From the above you cannot tell how much of the difference is due to changes in $x$ and in the index, $p$.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.