ON THE EQUIVALENCE OF WEIGHTED COUNTRY-PRODUCT-DUMMY (CPD) METHOD AND THE RAO-SYSTEM FOR MULTILATERAL PRICE COMPARISONS

The country-product-dummy (CPD) method, originally proposed in Summers (1973), has recently been revisited in its weighted formulation to handle a variety of data related situations (Rao and Timmer, 2000, 2003; Heravi et al. , 2001; Rao, 2001; Aten and Menezes, 2002; Heston and Aten, 2002; Deaton et al. , 2004). The CPD method is also increasingly being used in the context of hedonic modelling instead of its original purpose of filling holes in Summers (1973). However, the CPD method is seen, among practitioners, as a black box due to its regression formulation. The main objective of the paper is to establish equivalence of purchasing power parities and international prices derived from the application of the weighted-CPD method with those arising out of the Rao-system for multilateral comparisons. A major implication of this result is that the weighted-CPD method would then be a natural method of aggregation at all levels of aggregation within the context of international comparisons.