In what situations would biases arise in PPPs?
There are two situations in which biases are known to arise in PPPs. The first is the “Gerschenkron effect” (see below) and the other is when a country reports prices that are not representative of its consumption patterns but classifies them as being “representative”. Generally, prices which are “non-representative” tend to be higher than those which are “representative” of a country’s consumption. Therefore, a country which reports non-representative prices but classifies them as “representative” will overstate its price levels and therefore understate its per capita volumes.
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