Definition: Gerschenkron effect

Purchasing power parities

Applicable only to aggregation methods that use either a reference price structure, whereby each country’s quantities are valued by a uniform set of prices to obtain volumes, or a reference volume structure, whereby each country’s prices are used to value a uniform set of quantities to obtain PPPs (Purchasing power parities). For methods employing a reference price structure, a country’s share of total GDP (Gross domestic product) - that is, the total for the group of countries being compared - will rise as the reference price structure becomes less characteristic of its own price structure. For methods employing a reference volume structure, a country’s share of total GDP will fall as the reference volume structure becomes less characteristic of its own volume structure. The Gerschenkron effect arises because of the negative correlation between prices and volumes.
Source:
Eurostat, Organization for Economic Cooperation and Development (OECD), "Eurostat-OECD Methodological Manual on Purchasing Power Parities", Publications Office of the European Union, Luxembourg, 2012
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