Consistent comparisons of real incomes across time and space

Consistent real income comparisons over time and space are critical for studies on catch-up and convergence. The paper provides an analytical framework for making real income comparisons across countries and over time that satisfy transitivity and at the same time reflect an underlying nonhomothetic utility function for a representative consumer. The concept of reference price comparisons is developed and implemented using nonhomothetic translog and almost ideal demand systems. The paper discusses a direct approach, which uses all the parameters of the demand system to make real income comparisons, and an indirect approach, which adjusts the national price-based comparisons using reduced information only on income elasticities of demand. The proposed approach is empirically implemented using data from the 1980 and 1996 benchmark data from the International Comparison Program, and the empirical results confirm the analytical results discussed in the paper.