millions of the world's poorest people would find that their income was below the survival threshold. However, the effect implies that the money income level disparity as measured by international exchange rates is an illusion, because these exchange rates only apply to traded goods, a small proportion of consumption. If the genuine income differential (taking local prices into account) is exaggerated by the market exchange rate, so the real difference in the standard of living between rich and poor countries is less than GDP per capita figures would suggest, if converted at market exchange rates. To make a more significant comparison, economists divide a country's average income by its consumer price index. See also The Economist'''s Big Mac Index consistently shows fourfold differentials in the burger's price. Purchasing Power Parity is the situation in which RERs are 1, a nil Penn effect. Footnotes 1 For instance, economists in 1949 expected that one could buy similar quantities of meat in New York for one dollar as in Tokyo for 360 Yen, the pegged nominal exchange rate at the time. It was thought that deviations from this would mostly be caused by problems of supply, and the fact that exchange rates were not allowed to float to market levels by most of the world's central banks (before the 1970s and the end of the Bretton Woods era of gold convertibility). References Paul A. Samuelson (1994). "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics'' 2(3), pp. 201–26. (Abstract defining the Penn effect). (This issue has several papers discussing the effect.) External links 2004 Econometric study of the effect's rise since circa 1950 (their time series starts 1500 AD, with the Penn effect only noticeable 450 years into the data). The appendix contains a thorough (eight page) two country General equilibrium derivation of the effect's size based on the BS hypothesis across a continuum of industries, endogenously split between traded and non-traded production. However, the paper as a whole is focused on analysis of historical economic data. G-20 ICP: An analysis of the data in the International Comparison Program gives clear Penn effect examples Long Run Purchasing Power Parity: Cassel or Balassa-Samuelson? - A direct 2003 comparison of Cassel's pure PPP-hypothesis and the Penn effect deviation at scales estimated by the BS-hypothesis (using data from sixteen industrialized countries). Surprisingly, this University of Houston study finds that industrialized countries tend to fit Cassel's