International Comparisons: Multilateral Indices and Nonparametric Bounds

In a world where prices differ across countries, constructing valid international comparisons of prices and incomes is crucial for understanding global poverty, inequality, and growth. Multilateral index number methods aim to facilitate such comparisons, but their interpretation from an economic welfare standpoint can be questionable. To study and clarify this issue, I develop a theory-consistent approach by constructing non-parametric bounds on multilateral cost-of-living indices. These bounds leverage the existence of a reference consumer whose preferences can account for 98% of world output in 2017. The multilateral bounds tighten the classical bilateral bounds by an average of 23%. I then use these bounds to assess the welfare validity of widely-used international comparison methods.