Purchasing Power Parity

Purchasing power parities (PPPs) are indicators of price level differences across countries.They indicate how many currency units a particular quantity of goods and services costs in different countries. PPPs can be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency (the Purchasing Power Standard, PPS), thus eliminating the effect of price level differences across countries.

In particular, PPPs can be used to compare the Gross Domestic Product (GDP) of different countries without the figures being distorted by differing price levels in those countries.

Data sources

Consumer surveys (6 surveys), Construction survey, Equipment goods survey, Hospital survey, Rent survey, Hotels survey and additional data.

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Purchasing Power Parity

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  1. Main characteristics of the statistical survey
  2. Input data
  3. Main purpose of the survey and the use of the results
  4. Limitations in using the results
  5. Coverage
  6. Definitions
  7. Publishing policy and dissemination
  8. More detailed methodological explanations

Main characteristics of the statistical survey

Purchasing Power Parities (PPPs) and gross domestic products in purchasing power parities (GDP in PPP) are the results of the international statistical survey, carried out jointly by the statistical institutions of the participating countries and one or more international institutions. The majority of the European countries participate in the statistical survey, co-ordinated and guided by Eurostat. Eurostat, together with its contractors, prepares and co-ordinates the survey and calculates the results for the EU Member States, EU candidates, member states of EFTA and four Western Balkan countries. At the moment, 37 countries are included in the Eurostat survey. The statistical survey coordinated by Eurostat is called European Comparison Programme – ECP.

PPP and GDP in PPP are the results of a multilateral statistical exercise. Its specific feature in comparison to other statistical surveys is that the results are calculated by the international co-ordinator; namely, none of the participating countries can produce the results independently. The second specific feature is inter-dependency of the results among countries. A change in the data of one country does not influence only the results of this country but influences, more or less, the results of the other countries as well.

Input data

The input data for the calculation of PPP and GDP in PPP are provided by the national statistical institutes of participating countries. Annually they have to provide:

Prices for more than a thousand different kinds of products and services, which are chosen to represent the whole GDP consumption expenditure basket of products and services (products and services of household consumption, investment products, government services);

  1. Gross domestic product in the national currency, with detailed expenditure breakdown;
  2. Some other data: population data, temporal and spatial price indices, etc.

All countries in the comparison carry out the consumer price surveys on annual basis for approximately 1/3 of all products and services (annually 2 of total 6 consumer price surveys are carried out). For the rest of two uncovered thirds, the prices are estimated by updating the most recently collected prices by the consumer price indices. In a 3-year survey cycle all six surveys are carried out and the survey cycle starts again.

The investment goods surveys are carried out every second year. For intermediate, uncovered years, the prices are estimated.

Other data (for example GDP in national currency broken down into more detailed expenditure categories) are provided annually.

Main purpose of the survey and the use of the results

The main purpose of the survey is calculation of PPP with the aim to convert GDP of individual countries, expressed in different currencies and valued in different national price levels, in a common currency and at a common price level. GDP converted in this manner reflects only the differences in volumes (quantity and quality) and is thus comparable among countries. GDP in PPP is also referred to as real GDP, while GDP converted by the exchange rate is referred to as nominal GDP.

The results on GDP in PPP are used for different analytical in statistical purposes. The European Commission uses the results on GDP per capita volume indices also for administrative purposes, as criteria for EU structural funds entitlement.

PPPs and derived price level indices are used for following of price convergence in the EU Member States.

Limitations in using the results

The results on GDP in PPP are primarily intended for the comparison among countries within one year. For temporal comparisons, that is for comparisons between years, they are less appropriate. The results on GDP per capita in PPP should not be used for strict, precise ranking of countries and for establishing the GDP growth rates between the years. Also, the results on PPP should not be used for establishing the currency depreciation/appreciation or equilibrium exchange rate.

Coverage

It is a sample survey. Each of participant country needed to collect a minimum price for each product and services, to assured and believes average prices for each product and services, based on the structure of trade of country.

Definitions

Purchasing Power Parities (PPPs)

PPPs are generally defined as spatial deflators and currency converters, which eliminate the effects of the differences in price levels between countries. PPPs have two functions, the function of spatial price deflators and the function of currency converters into some common currency. When countries have a common currency, PPPs have only the first function, i.e. the function of spatial price deflators.

In their simplest form, PPPs are price relatives of individual products and services expressed in national currencies of different countries. On the level of GDP, PPPs are aggregated price relatives for the whole range of products and services of GDP.

Price level indices (PLI)

The ratio of PPP and the exchange rate (multiplied by 100) is price level index (PLI). PLI for the level of GDP is the indicator of the general price level.

Purchasing Power Standard (PPS)

The selection of the currency in which the PPP results are expressed is conventional. In the Eurostat comparison the results are expressed in “currency” called PPS. PPS is an artificial, fictive currency which at the level of the EU equals to one euro. Currently 1 PPS equals 1 euro at the level of EU-27. PPS or “EU-27 euro” is a “currency” which reflects the average price level in the EU-27.

GDP in PPS and GDP per capita in PPS

GDP in PPS is GDP in national currency converted to a common currency with PPP, expressed as the number of national currency units per 1 PPS. GDP per capita in PPS is GDP in PPS divided by the respective country total population. More general terms for GDP in PPS are also real GDP, GDP in PPP or GDP at purchasing power.

Volume indices

Volume indices show GDP in PPS of each individual country relative to a chosen comparison base. Volume indices are most commonly expressed on EU as a base, currently on EU-27 (EU-27 = 100). GDP in PPS volume indices show economic sizes of the countries.

Volume indices per capita

Volume indices per capita are a standardized way of expressing the results on GDP per capita in PPS between countries. Volume indices per capita show the volume of GDP per capita in PPS relative to the average of a chosen base country or a group of countries. Volume indices are most commonly expressed in relation to the EU average, currently on EU-27 (EU-27 = 100). Volume indices per capita are treated as the indicator of development and economic well-being of the population.

Publishing policy and dissemination

Eurostat publishes the results on PPP and GDP in PPP annually. For the same reference year both sets of the results are regularly produced and published four times:

  1. now-cast (projection): 5 months after the end of the reference period
  2. first estimate: 12 months after the end of the reference period
  3. second estimate: 24 months after the end of the reference period
  4. final results: 36 months after the end of the reference period

Exceptionally, in case of bigger national accounts revisions, which are usually made by all countries, both kinds of results (PPP and GDP in PPS) can be revised later than 36 months after the reference period. Additionally, the results on GDP in PPS can be updated within and outside the above mentioned timespan in the cases when one or several countries revised their GDP figure in national currencies (or population figures). In these cases PPPs are not recalculated and thus not changed.

The data on PPPs, price level indices, expenditure in national currencies, expenditure in PPS and volume indices at the level of 60 analytical expenditure categories of GDP, are published in the Eurostat dissemination database, theme “Economy and finance” (domain “Purchasing Power Parities -PPPs”). The data on PKM, GDP in PPS, volume indices and population figures are published also under the domain “National Accounts (including GDP)”, collection “Annual national accounts”.

Eurostat publishes PPPs and derived indicators also in the publication »Statistics in Focus« (SIF). In this type of publication, besides the results on the GDP level, the results on the level of two most important GDP aggregates are published: actual individual consumption and household final consumption expenditure.

Household final consumption expenditure consists of consumption expenditure of households and some products and services that the households produce for their own use (imputed rents).

Actual individual consumption consists of household final consumption expenditure and of expenditure for those services which are consumed by households individually but are produced and financed by the government and non-profit institutions (health and education services).

On the level of actual individual consumption Eurostat publishes two indicators: volume indices and price level indices. On the level of household final consumption expenditure and a selection of its categories Eurostat publishes price level indices. The selected categories of household final consumption expenditure published in SIF are:

  1. Food and non-alcoholic beverages
  2. Alcoholic beverages and tobacco
  3. Clothing
  4. Footwear
  5. Electricity, gas and other fuels
  6. Furniture and furnishing, carpets and other floor coverings
  7. Household appliances
  8. Audiovisual, photographic and computer equipment
  9. Personal transport equipment
  10. Transport services
  11. Communication
  12. Restaurants and hotels.

More detailed methodological explanations

More detailed methodological explanations can be found on Eurostat PPP dedicated web page:

http://epp.eurostat.ec.europa.eu/portal/page/portal/purchasing_power_parities/methodology