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Conventional estimates of purchasing power parities (PPP) rely on cross-country price data. Using Engel curves, Almås (Am Econ Rev 102:1093-1117, ) was, however, able to show that PPPs contain substantial bias. Since constructing conventional estimates is expensive and time consuming, Almås' idea of employing Engel curves is welcome. This article examines the viability of the Engel curve approach to PPP and its sensitivity to differences in relative prices and preferences by estimating Engel curves not only between countries but also for regions within a given country. My empirical evidence from the United States and Norway suggests that the differences can be problematic, but not sufficiently to discredit the new methodology. A pragmatic approach to PPP estimation between countries that are different is to compute a PPP band, rather than a point estimate. I present a practical example of this using expenditure data from 2001, which yields a band for NOK and US dollar. [ABSTRACT FROM AUTHOR]

This article demonstrates how to estimate latent total consumption expenditure or material standard of living in households by inverting estimated Engel curves. While the conventional estimator, total purchase expenditure, is unbiased for latent total household consumption expenditure, it is not variance minimizing since it is an un-weighted sum. In two stages, this article derives a variance-minimizing, unbiased estimator by first estimating and inverting Engel curves; then combining the estimators from the inverted Engel curves. The employed latent variable method allows for utilization of non-expenditure relations. The suggested method may help improve the accuracy in studies of consumption inequality and tax evasion. [ABSTRACT FROM AUTHOR]