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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.
The purpose of calculating purchasing power parities is to enable international comparisons in real values. The PPPs are also used in compiling comparable indices for the price level in different countries.
To enable comparisons in real values among countries, it is essential to convert the amounts into a common currency. One option is to convert the amounts on the basis of the currency rate. However, when the currency rate for converting the amounts is applied, the comparisons do not make allowance for the differences in the national price level. If conversions are conducted on the basis of the currency rate there is a tendency in countries with a relatively high price level to overestimate the gross domestic product, whereas in countries with a relatively low price level, the gross domestic product is underestimated.
However, when PPPs are applied for conversion into a common currency, differences in the price level are taken into account. The purchasing power parity reflects the relative prices among two or several countries. The conversion of, e.g. a country's GDP into another currency with PPPs, is tantamount to calculating the GDP of the country in question at the prices of another country. This implies that comparisons in real values or in terms of quantities are conducted among the two countries.
Generally speaking, differences in real production and income among rich countries (with a relatively high price level) and poor countries (with a relatively low price level) are considerably reduced, when purchasing power parities are applied in converting the amounts, instead of applying currency rates. Furthermore the currency rate is often subject to violent fluctuation and as a result of a change in the currency rate; the country may suddenly appear richer or poorer in comparisons with other countries, even though there has been no changes in real values. Consequently, international comparisons should be conducted on the basis of purchasing power parities and not currency rates. 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 Statistics Denmark Statbank:
•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) defined as ratio between PPPs and current nominal exchange rate •Volume indices of real expenditure per inhabitant •Real expenditure per inhabitant defined as nominal expenditure divided by the PPP •Volume indices of real expenditure per inhabitant
PPPs are produced in accordance with the final expenditure classification of the European Standard of Accounts (ESA 2010).
PPPs are classified by type of final expenditure - actual individual consumption expenditure, actual collective consumption expenditure and capital expenditure - and, in the case of actual individual consumption expenditure, by purchaser - households, non-profit institutions serving households (NPISHs) and general government. The prices underlying the calculation of PPPs adhere to the definitions, concepts, classifications and accounting rules of ESA 2010.
Basic headings and analytical categories
For the purpose of the PPP calculation, the main expenditure aggregates of GDP which are: Individual consumption expenditure by households Individual consumption expenditure by NPISHs Individual consumption expenditure by government Collective consumption expenditure by government Gross fixed capital formation Changes in inventories and acquisitions less disposals of valuables Balance of exports and imports
are broken down into 276 basic headings. The basic heading is the lowest level of aggregation, at which products are sampled and product prices collected. It is the lowest level for which countries should provide numerical expenditure weights. Below the basic heading level are the individual items of the product sample. For example, rice is a basic heading and basmati rice and jasmine rice, are individual products within it.
PPPs are published at the level of 61 analytical categories which comprise aggregates of basic headings and include some of the main expenditure aggregates like GDP, actual individual consumption, household final consumption, collective consumption and gross fixed capital formation.
The classification of commodities and services for households consumption expenditure is conducted in accordance with the Classification of Individual Consumption by Purpose (COICOP). The classification of commodities and services for government consumption expenditure is conducted in accordance with Classification of the Functions of Government COFOG). Total goods, total services and gross fixed capital formation are classified in accordance with Classification of Products by Activity (CPA).
PPPs are calculated for GDP and its various sub-aggregates on the expenditure side of national accounts.
Statistical concepts and definitions
Purchasing Power Parity: The purchasing power parity reflects relative prices. A purchasing power parity is simply defined as the price ratio between the national currencies for the same goods or services in different countries. If specific goods, e.g. a loaf of bread costs DKK 15 in Denmark and Euro 1.5 in Germany, the purchasing power parity for a loaf of bread between Denmark and Germany is 15/1.5 = DKK/Euro 10. If a loaf of bread in Denmark is converted on the basis of the purchasing power parity its value will be DKK 15/DKK10/Euro = Euro 1.5, corresponding to the value of a loaf of bread in Germany. If the prevailing currency rate is, e.g. DKK /Euro 7.5, and if this currency rate is applied for converting a loaf of bread in Denmark into DKK 15, it will be tantamount to a value of DKK 15/DKK 7.5/Euro = Euro 2. Subsequently, comparisons conducted using conversions on the basis of the currency give an incorrect picture of the amount in real terms. The larger the size of the differences between the purchasing power parity and the currency rate, the more misleading will be the comparisons made on the basis of conversions of the currency rate.
Price level indices: Indicates the domestic price level in relation to the EU average. For example, if the Danish price level index is 126 and the Spanish price level index is 95, it means that the price level in Denmark is 26 pct. higher than the EU average, while the price level in Spain is 5 pct. lower than the EU average.
Price: Average domestic price for a well specified good or service, which is representative of the consumption pattern in a given country. All prices are actual prices paid by consumers, i.e. including VAT and other duties.
PPPs are calculated for each of the participant countries, for the EU as a whole, and for the euro area. There is no regional breakdown.
The price level of goods and services in Denmark, compared to other countries in Europe. The statistical population is the expenditure side of the National Accounts, as defined in ESA 2010.
PPP cooperation in Europe includes the 28 EU countries, Iceland, Norway and Switzerland and the candidate countries.
PPPs are available back to 2000.
Not relevant for this statistics, because PPPs are primarily spatial indicators.
Unit of measure
PPPs can be interpreted as the exchange rates of countries' national currencies against the PPS. They express the number of currency units per PPS.
Real expenditures are expenditures in national currency converted to PPS using PPPs. They are thus denominated in PPS.
PLIs and volume indices per capita are indices that, in Eurostat's database, use EU28, EU27 or EU15 as "base country" (EU28=100, EU27=100 or EU15=100, depending on the user's choice).
The reference period is the calendar year.
Frequency of dissemination
The statistics are published annually.
Legal acts and other agreements
The common rules for the provision of basic information (input data), the calculation and dissemination of PPPs are laid down in Regulation (EC) No 1445/2007 of the European Parliament and of the Council of 11 December 2007.
There is no national legislation governing the preparation of purchasing power parities.
Cost and burden
The response burden is equal to zero. All data are collected by the price collectors.
International volume and price comparision. Additional information can be obtained by Statistics Denmark.