Purchasing Power Parities (PPP)
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Consumption and prices.Zdravka Bosanac
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The purpose of purchasing power parities (abbreviated PPPs) is to measure relative prices in different countries. The PPPs are used for international comparisons in real values and for compiling indices of price levels. When, e.g. GDP and other national accounts components are converted with PPPs, differences in the national price levels are taken into account. This implies that comparisons in real values of the converted amounts are thus made possible. However, differences in national prices are not taken into account, if conversions are made on the basis of the currency rate.
Since the 1970s, Denmark has participated in the surveys of purchasing power parities. Price surveys are conducted under the auspices of what is known as the ECP cooperation (European Comparison Programme) comprising 37 countries (EU 27, EFTA countries and EU candidate countries). The work is coordinated by Eurostat. Globally, the work is coordinated by the OECD, IMF and World Bank under the auspices of the ICP cooperation (International Comparison Programme).
Statistical presentation
Purchasing power parities (PPPs) are indicators of price level differences across countries. PPPs tell us how many currency units a given quantity of goods and services costs in different countries. PPPs can thus be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency (the Purchasing Power Standard, PPS), eliminating the effect of price level differences across countries.
The main use of PPPs is to convert national accounts aggregates, like the Gross Domestic Product (GDP) of different countries, into comparable volume aggregates. Applying nominal exchange rates in this process would overestimate the GDP of countries with high price levels relative to countries with low price levels. The use of PPPs ensures that the GDP of all countries is valued at a uniform price level and thus reflects only differences in the actual volume of the economy.
PPPs are also applied in analyses of relative price levels across countries. For this purpose, the PPPs are divided by the current nominal exchange rate to obtain a price level index (PLI) which expresses the price level of a given country relative to another, or relative to a group of countries like the EU28.
The production of PPPs is a multilateral exercise involving the National Statistical Institutes of the participating countries, Eurostat and the OECD.
Indicators in Eurostat's dissemination database
The indicators published in the price domain on Eurostat's website are the following: •Purchasing power parities (PPPs) scaled to the sum of expenditures of the EU Member States expressed in euro. This means that the PPP of one particular country indicates how many units of national currency one would need in that country in order to maintain the purchasing power of one euro in the EU •Price level indices (PLIs) as defined above •Nominal expenditure in national currency, as extracted from each country's national accounts •Nominal expenditure as percentage of GDP •Nominal expenditure in euro •Nominal expenditure per inhabitant in euro •Real expenditure, defined as nominal expenditure divided by the PPP •Real expenditure per inhabitant •Volume indices of real expenditure per inhabitant •The price convergence indicator, defined as the coefficient of variation of the PLIs of household final consumption expenditure (HFCE). It provides an estimate of the price convergence within a group of countries. For example, if the price convergence indicator for EU28 decreases over time, the national price levels in the Member States are converging.
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Statistical processing
Price surveys are conducted in order to provide price input data for household consumption, individual government consumption, collective consumption and gross fixed capital formation (investment goods and services). Reference (imputed) PPPs are used for NPISH consumption, inventories, and net exports.
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Relevance
The EU Commission uses GDP per capita PPP converted, as basis for allocating funds from the Structural Fund to reduce the financial inequalities among and within the 28 EU Member States. Furthermore, indicators derived from PPPs are used for a wide range of analytic purposes, often providing background information for policymaking in the European institutions, in international organizations like the International Monetary Fund and the World Bank, and in national governments.
Accuracy and reliability
In the price surveys, the most important source of statistical margins of sampling errors is the range of goods and services, which are not equally representative of all countries included in the international comparisons. The composition of consumption expenditure differs among countries, and this gives rise to potential conflicts between representativeness and data comparability. For some areas, e.g. health it is particularly difficult to provide comparable information. The structure of the health sector differs among countries, and there are no "pure" market prices for these services, which constitutes another statistical margin of sampling error. The margins of sampling errors are not estimated.
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Timeliness and punctuality
The statistics are usually published without any delay in relation to the scheduled date of publication.
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Comparability
Purchasing power parities are compiled for the purpose of conducting price and volume comparisons for a specific year among countries. Consequently, they are comparable across the participating countries. Comparisons over time must be interpreted with caution, as the basket of goods and services differs from one year to another.
In the calculation of PPP, price level index and volume index, the average of EU28 has been used as a reference country (group of countries) until 2020. With the United Kingdom's withdrawal from the European Union (EU), the EU27 (excluding the UK) = 100 will be used as a reference country (group of countries) from 2020. This has only a minor impact on the comparability of PPPs, the price level index and the volume index between 2019 and 2020.
Accessibility and clarity
These statistics are published annually in a Danish press release, at the same time as the tables are updated in the statbank. In the statbank, these statistics can be found under International volume and price comparision. Internationally, these statistics are available through OECD, Eurostat and Norden. For further information, go to the subject page.