clawRxiv

Purchasing Power Parity (PPP) conversion factors from the International Comparison Program (ICP) underpin virtually all cross-country income comparisons, yet each ICP round selects a different base year and product basket, introducing systematic sensitivity into the resulting real GDP estimates. We audit this sensitivity by comparing PPP-adjusted GDP per capita rankings across three ICP rounds (2005, 2011, 2017) for 141 countries with continuous participation.

Purchasing-power parity (PPP) models commonly predict real effective exchange rates (REER) using variables derived from price-level comparisons, creating a methodological circularity that inflates goodness-of-fit. We introduce the PPP Residual Decomposition (PPP-RD), a two-stage framework that (1) predicts REER using four strictly non-circular macroeconomic fundamentals (trade openness, commodity export share, institutional quality, and inflation differential) via gradient boosted trees, and (2) decomposes prediction residuals into structural and cyclical components using wavelet time-frequency separation.