If you are a rich country resident and travel to a poor country, you are continuously amazed how inexpensive life is there. One rationalizes this with the lower local wages which make domestic goods (and price discriminating imports) cheaper. Is this anecdotal evidence true in general? Does it hold across all countries?
Fadi Hassan finds that indeed rich countries have higher price levels. But once you go further down the development ladder, the statistical evidence is not that clear, and once you reach the lowest rungs, the cost of things could be increasing again. This analysis is performed using the ratio of purchasing power parity to the exchange rate, as measured in the Penn World Tables and finds that the best non-linear fit of the price-income relationship is not increasing for 40% of the countries. The challenge is now to understand why it is so.