Benchmark averaging and the measurement of changes in international income inequality

Using data for 113 countries covering the period 1980-2005 we show how international comparisons of income inequality and the way it changes over time are inherently sensitive to (i) the choice of multilateral price index formula used to convert per capita incomes into units of the same currency, (ii) the approach (if any) used for reconciling spatial benchmarks with national growth rates, and (iii) the way inequality is measured. We then consider how best to deal with these issues and highlight some distortions that can arise in such comparisons. Based on our preferred methods we observe convergence when countries are population weighted and divergence when they are not.