Definition: Penn effect

Category: Purchasing power parities

The overstatement of the economic size of high-income countries and the understatement of the economic size of low-income countries that results when exchange rate converted GDPs (Gross domestic product) are used to establish the relative sizes of economies. The Penn effect arises because price levels are usually higher in high-income countries than they are in low income countries and exchange rates do not take account of price level differences between countries when used to convert their GDPs to a common currency. http://ec.europa.eu/eurostat/product?code=KS-RA-12-023&mode=view