Download Purchasing Power Parities: Statistics to Describe the World

International Comparison
Program
Frederic A. Vogel
Global Manager, ICP
The World Bank
Purpose or goal of this presentation
• Provide an understanding of what is a
Purchasing Power Parity
• How they are estimated and their
statistical and economic properties
• Provide an overview of the International
Comparison Program
• Present uses of PPPs
The World Bank
2
The Problem—Comparing economic measures
across countries
• Country Level Statistics are in National
Currencies.
• Comparisons across countries require
converting data into a common
currency i.e.
– Gross Domestic Product
– Inter country comparisons of Agricultural
output
The World Bank
3
How convert national data into a common
currency?
• Exchange rates
•
or
• Purchasing Power Parities
The World Bank
4
Statistical basis of PPPs
N
155
GDP or TVP A =

i 1
GDP OR TVP B=
PAij QAij
j 1
155
N
i 1
j 1

PBij QBij
Exchange rates or PPPs ?
Direct comparisons of country A with country B:
GDP or TVP A
using B prices
The World Bank
155
=
N
 P
Aij
i 1
j 1
. (PBij / PAij ). QAij
5
Why not use exchange rates (X-rates)?
• X-rates will convert the GDPs to a common
currency
• X-rates are easily understood being
determined by the demand for & the
supply of currencies
• X-rates are easily observed, cover all
countries, readily available
The World Bank
6
Exchange rates differ from PPPs
They do not
measure differences
in the relative price
levels between
countries
Are fixed
by policy
in some
countries
The World Bank
Because…
Currency
speculation and
short-term
capital movements
cause exchange
rates to fluctuate
Fluctuations can
make some
countries appear
“richer” or “poorer”
almost overnight –
e.g. Euro from $ 0.91
to $1.20 < 3 years
Price levels
differ across
components
of GDP
7
What is a Purchasing Power Parity (PPP)?
• Form of Exchange Rate
• Based on comparison of prices
between countries
– International Price Index
– Compares prices at a point in time
across space vs. CPI comparing prices
across time
• (Big Mac Example)
The World Bank
8
Calculating PPPs: The Big Mac Example
The Economist has
popularized its
international price
comparisons based on
the Big Mac
By comparing the local
currency prices of Big Macs,
the Economist measures
relative price levels and
compares these to the
exchange rate
The World Bank
9
Calculating the Big Mac Index
Compare the price of a Big Mac in four countries
Price in
national
currency
PPP to
US $
Exchange
Rate
PPP scale
factor
Philippines
68.02
23.5
55.30
2.4
China
10.20
3.5
7.50
2.1
Switzerland
6.17
2.1
1.26
0.6
US
2.90
1.0
1.00
1.0
The World Bank
10
Limitations of the Big Mac Index
The Big Mac Index is easy to calculate, but it
leaves out a lot
• It is based on only one product, and is not
representative of the output of the full
economy
• For example, Big Macs are sold mostly in
urban areas and leave out traditional food
such as rice
What is needed is an index that compares the
prices of a large, representative basket of goods
across many countries
The World Bank
11
Overview of the International Comparison
Program
The governance structure
Explain the process and analytical methods to
compute PPPs to Compare GDPs and similar
economic variables between countries
Procedure for 2005 benchmark year
First regional comparisons which then are linked to
provide PPPs at international $ for every country.
Present uses of PPPs
The World Bank
12
ICP Governance
ICP under auspices
of the UN Statistical
Commission
ICP Executive Board
Global Office
World Bank
Technical Advisory
Group
Africa
Asia
CIS
LAC
West Asia
(48 countries)
(23 countries)
(10 countries)
(10 countries)
(11 countries)
The World Bank
Eurostat/
OECD
(45 countries)
13
Historical Global ICP Participation
The World Bank
14
Basic Data Required to compute PPPs for
GDP --Expenditures
National annual prices for products chosen from
a common basket of well-defined goods &
services
A breakdown of final expenditure on National
GDP into 155 categories using a common
classification
The World Bank
15
The steps
• Start with GDP and Main aggregates
– Individual Consumption by Households
–
–
–
–
–
–
Individual Consumption by NPISH
Individual Consumption by Government
Collective Consumption by Government
Capital Formation
Change in Inventories
Trade Balance
Divide into 155
Categories
The World Bank
16
Individual Consumption by Households—
Categories
•
•
•
•
•
•
•
Food & non-Alcoholic Beverages-29
Alcohol and Tobacco
Clothing & Footwear
Housing, water, electricity
Health
Education
Transport--etc
The World Bank
17
Food Basic Headings
•
•
•
•
•
•
Rice
Other Cereals
Pasta
Beef and Veal
Fish & Seafood
Fresh Milk
The World Bank
•
•
•
•
•
Fresh Fruit
Sugar
18
Purchasing Power Parities - The Steps
Start with the full GDP
divide into subgroups
155 Basic Headings
Define products
matching “like with like”
collect prices
The World Bank
E.g. Food
29 Basic Headings
about
10 per Basic
Heading
1,000+
products
19
The Structured Product Definition
Define Products
The World Bank
20
Data Collection
• Utilize CPI framework if possible
• supplemented to obtain national
coverage
– Product coverage
– Annual estimates
National Annual Averages vs time to time
change
The World Bank
21
Number of items priced by region
Category
Food and non-alcoholic beverages
Africa
Asia
W. Asia
LAC
CIS
Ring
356
223
353
147
198
281
41
19
21
8
20
30
128
78
162
136
104
132
Housing and utilities
21
17
12
18
22
35
Furnishing and household equipment
95
85
83
77
91
124
144
112
69
51
75
162
Transportation
55
65
29
33
47
96
Communication
19
19
12
8
16
28
Recreation and Culture
49
70
59
54
79
96
7
7
11
10
7
7
Restaurants
51
25
20
14
45
60
Misc goods and services
34
56
31
22
36
44
1000
776
862
578
740
1095
Alcoholic beverages and tobacco
Clothing and footwear
Health
Education
Total
.
The World Bank
22
Purchasing Power Parities - The Steps
Start with the full GDP
divide into subgroups
155 Basic Headings
Define products
matching “like with like”
collect prices
Calculate Basic Heading
parities
The World Bank
E.g. Food
29 Basic Headings
about
10 per Basic
Heading
1,000+
products
Regional PPPs at
Basic Heading level
23
Calculation of PPPs
1. First step-compute BH PPPs
2. Then combine / average Basic Heading
PPPs to aggregates such as food,
clothing, and on the consumption and the
GDP
3. ICP Handbook,
www.worldbank.org/data/ICP
The World Bank
24
Basic Heading PPPs
Basic Heading
Rice
Country A
Prices in
Nat'l
Currency
Product
Long grain rice
Medium grain rice
Small grain rice
imported
Country B
Prices in
Nat'l
Currency
Country C
Prices in
Nat'l
Currency
Price ratios
B/A
10
12
15
25
40
16
15
Geometric means/ PPPs
PPPs using direct and indirect measures
100
30
100
C/A
C/B
2.5
4
1.33
1
10
2
4
2
1.75
4.31
2.24
1.81
4.17
2.31
b/a = (c/a)/(c/b)
Countries have equal weights.
The World Bank
Products have equal weights.
25
PPPs for Basic Headings
Two approaches
– EKS method
• OECD-Eurostat countries and the CIS
Region
– CPD method
• Used in all other Regions
The World Bank
26
Elteto-Koves-Sulc (EKS) Method
• Bilateral PPPs are calculated for each pair of countries in
the region.
• They are the geometric averages of the price ratios of
the individual products included in each Basic Heading.
• If not all the products were priced by all the countries:
• Bilateral PPPs obtained in this way will not be
transitive.
• If they are not transitive, then for the three
countries A,B and C.
PPP
The World Bank
A
B
 PPP
A
C
 PPP
C
B
27
Elteto-Koves-Sulc (EKS) Method
Bilateral PPP made transitive by:
– Taking the geometric average of the PPP
calculated directly between A and B.
– And all the PPPs for A and B that can be
calculated indirectly.
With 3 countries we have:
1
A

C 3
A
A
1
PPP
B
B

PPP transitive   PPP 

B
B

PPP A PPP C 
The World Bank
28
CPD Method
The CPD is a regression model which assumes:
– - Individual product PPPs within a Basic
Heading are constant between any given pair of
countries
– - Each country has overall price level that
determines the absolute prices of products in
the Basic Heading for that country
The World Bank
29
CDP Method
• When there are c countries and n products, the
model can be written (in logarithmic terms) as:
ln pij  ln ai  ln b j  ln uij
i  1,2,..., c; j  1,2..., n
• pij is the price in country i of product j, ai is the
country parameter, bj is the product parameter,
and uij is the residual term. Results are transitive
The World Bank
30
Combine Basic Headings
Countries have equal weight. EKS used to put all bilateral pairs into
Multilateral comparison with transitive results. Do not have additivity
The World Bank
31
Aggregation—Different methods available
• EKS—per example. Weights based on
relative shares, thus countries treated
equally regardless of economic size.
– Components not additive to total
• G-K—Geary-Khamis. Uses quantity
weights. Results are additive, however,
can overstate real expenditures in poor
countries. (Gershenkron effect)
The World Bank
32
Aggregating PPPs
Geary-Kharmis (GK) Method
• Based on the simple idea of estimating a unique
set of international prices ( piG ) and these, like
constant prices in a time series, are then used to
revalue expenditures in each country.
piG
The World Bank


j
j
C
p
q
i
i
  
x
C
G. j
PPP
j
j 1
q


i
j 1







33
Aggregating PPPs
Geary-Kharmis (GK) Method
• There are i to n products and j to C countries; G
refers to the group of countries. The group
(international) price is a quantity-weighted average
of the prices in the C countries with these prices
converted to a common currency. The PPP is
n
defined as:
p jq j
G
i
(p )
PPP
G. j


i 1
n

i 1
The World Bank
i
i
piG qi j
34
Aggregating PPPs
Geary-Kharmis (GK) Method - Problem
• Gerschenkron effect
– Tends to overstate the volumes of countries
whose relative prices are very different from the
uniform set of prices.
– Tends to resemble the price structure of the
larger and richer countries in the group.
– Volume measures obtained for poor countries
appear artificially large.
The World Bank
35
Purchasing Power Parities - The Steps
Start with the full GDP
divide into subgroups
155 Basic Headings
Define products
matching “like with like”
collect prices
Calculate Basic Heading
parities
Combine Basic Heading
PPPs to subgroups,
then to GDP
The World Bank
E.g. Food
33 Basic Headings
about
10 per Basic
Heading
1,000+
products
Regional PPPs at
Basic Heading level
First Regional, then Global GDP PPPs
36
Linking regions for Global Comparison
The previous steps done independently by
each of 6 regions
Selected countries from each region
collect prices using a product list reflecting
the world as a whole
The World Bank
37
Ring to link regions
• Combine regional lists to create new
set of global specifications
– Updated regional SPDs to global set
– Supporting software
• Develop linking methodology—see ICP
Handbook www.worldbank.org/data/icp
The World Bank
38
Number of items priced by region
Category
Food and non-alcoholic beverages
Africa
Asia
W. Asia
LAC
CIS
Ring
356
223
353
147
198
281
41
19
21
8
20
30
128
78
162
136
104
132
Housing and utilities
21
17
12
18
22
35
Furnishing and household equipment
95
85
83
77
91
124
144
112
69
51
75
162
Transportation
55
65
29
33
47
96
Communication
19
19
12
8
16
28
Recreation and Culture
49
70
59
54
79
96
7
7
11
10
7
7
Restaurants
51
25
20
14
45
60
Misc goods and services
34
56
31
22
36
44
1000
776
862
578
740
1095
Alcoholic beverages and tobacco
Clothing and footwear
Health
Education
Total
.
The World Bank
39
Results Published by Three Regions
•
•
•
•
LAC—Full GDP—10 countries
Asia—Full GDP—23 countries
Africa—Consumption—48 countries
Remaining to follow Oct/Nov. for
regional data.
• Global results--December
The World Bank
40
Examples how PPPs are used
System of National Accounts calls for real
comparisons between countries to be done using
PPPs
World Bank uses PPPs to establish international
poverty lines
IMF measures size of economy and aggregate
growth rates in PPP terms
EU allocates Structural Funds to member states
The World Bank
41
Examples how PPPs are used
WHO and UNESCO use PPPs to measure health and
education expenditures
Compare per capita expenditures for health,
education, etc.
The World Bank
42
Other Applications of PPPs
PPPs differ from sector to sector allowing price
levels for components of GDP to be compared
across countries
Use comparative ratios of investment to GDP to
evaluate economic growth
Evaluate living standards using PPP per capita
expenditures
The World Bank
43
Sustainability—www.worldbank.org/data/ICP
• ICP Handbook and Operational Manuals
• Software and supporting
documentation
• Numerous research papers
• Newsletter
The World Bank
44
Thank you
Questions????????????????/
Fundamental Principles of the ICP
• Comparability of results between
countries
• Common understanding of data
sharing and confidentiality
• No other international statistical
program requires as much cooperation
between international, regional and
countries
The World Bank
46
The ICP: New Benchmark Estimates
The International Comparison Program, now
underway, is a global initiative to produce new
PPPs
Includes over 100 countries plus adding in
40+ Eurostat/OECD — 1000+ items priced
New methods of data collection and
estimation will improve quality
New PPPs will allow recalibration of
estimates of poverty and sizes of
economies
The World Bank
47
Table 3. CO² emissions per unit of GDP
(tons per Country
Dollar of GDP)Using PPPs
Using Exchange Rates
Sweden
0.20
0.20
Zambia
0.21
0.53
France
0.23
0.27
Brazil
0.23
0.49
India
0.35
1.90
Mexico
0.39
0.60
United States
0.54
0.54
China
0.66
2.50
South Africa
0.73
2.28
Ukraine
1.09
6.92
Russia
1.17
4.65
The World Bank
48
World Bank Atlas Method (Exchange rate based)
Three year moving of annual average exchange rates adjusted by
The ratio of the GDP and IMF SDR deflators
e *t =
et
=
Pt
=
S$
Pt
=
1
3
e t-2
Pt
S$
/
P t-2
Pt
S$
P t-2
+ e t-1
Pt
P t-1
S$
/
Pt
S$
+ et
P t-1
Annual average x-rate
GDP deflator year t
IMF Special Drawing Rights (SDR) deflator in US $
The World Bank
49
Number of products to price in each Basic
Heading
• Depends on homogeniety of products
with the Basic Heading
• Fish and sea food vs.
• Milk and eggs
• Time and cost also factors
• Need 5 minimum up to 20+
The World Bank
50
Why We Need New Estimates of PPPs
Existing PPPs are based on price surveys
carried out during the 1993-96 period and
updated by comparing domestic price levels
They include estimates for countries that did not
participate. For example, China, India, and many
African countries were not included in the
previous surveys
Size and structure of economies have changed
The World Bank
51
Multilateral Comparison
The parity between any two countries does
not depend upon which country is used as the
base for the comparisons
Final PPPs are based on a composite of direct
and indirect parities
Prices from one country affect PPPs for all other
countries
The World Bank
52
Country Product Dummy (CPD)
pij =  j i ij
15)
i = 1, 2, … n : j = 1, 2, … c
(12) 1 = 1 = 1
ln pij = ln  + ln 2 xi2 + ln 3 xi3 + …ln c xic +
ln 2 y2j + ln 3 y3j + … ln n ynj + ij
Uses all data—each price receives same weight
Provides estimates of Standard errors of PPPs
Model can be extended to use weighting based on
Expenditure weights for example, or whether or not
Price is for a representative product.
The World Bank
53
Combine Basic Headings
The World Bank
54
Different methods can be used
• EKS—Elteto, Koves, and Szulc
– Provides results that are base country invarient
and transitive
• CPD—Country Product Dummy
– Regression method-results are invarient and
transitive
– Provides measures of variability
– Used for this round
• Both provide same results if there are no
missing prices
The World Bank
55
PPPs for non-benchmark countries in ICP
PPPs for non-benchmark countries(ICPY) = b1(Atlas Y) + b2(HSER) + e
ICPY
Atlas
PPP adjusted GNI per capita
Y
Atlas GNI per capita
HSER
Gross High School enrollment
e
Residual term
The World Bank
56
Statistical basis of the ICP
N
155
GDP country A =

j 1
i 1
155

GDP country B =
i 1
155
N
i 1
j 1

PAij QAij
PBij QBij
Fundamental Principles
Products must be
Comparable
Using same pricing
Concepts
Same time period
Need to share data
Direct comparisons of country A with country B:
GDP country AB
using B prices
The World Bank
155
=
N
 P
Aij
i 1
. (PBij / PAij ). QAij
j 1
57
Statistical basis of the ICP
Problem—PPPs Owner occupied Housing---Estimate quantities
155
GDP country A =
N

i 1
j 1
PAij QAij
155

i 1
GDP country B =
155
N
i 1
j 1

PBij QBij
Direct comparisons of country A with country B:
GDP country AB
using B prices
The World Bank
155
=
N
 P
Aij
i 1
. (PBij / PAij ). QAij
j 1
58
What are PPPs?
Purchasing Power Parities based on
relative price levels between countries
A method to convert national GDPs to a
common currency for comparison
purposes using national prices instead of
exchange rates
The World Bank
59
Statistical basis of the ICP
Problem—PPPs Owner occupied Housing---Estimate quantities
155
GDP country A =
N

i 1
j 1
PAij QAij
155

i 1
GDP country B =
155
N
i 1
j 1

PBij QBij
Quantity sq.feet,
Number rooms
Quality, water,
Electricity, etc
Traditional vs.
Modern
Direct comparisons of country A with country B:
GDP country AB
using B prices
The World Bank
155
=
N
 P
Aij
i 1
. (PBij / PAij ). QAij
j 1
60
Real Expenditure Shares
Asia =100
70
60
50
40
30
20
10
0
GDP
AFCH
GFCF
PRC
The World Bank
IND
IRN
INO
THA
PAK
61
Relative Per Capita--Asia = 100
350
300
250
200
150
100
50
0
GDP
AFCH
GFCF
PRC
The World Bank
IND
IRN
INO
THA PAK
62
Real Expenditure Shares
Latin America =100
60
50
40
30
20
10
0
The World Bank
R
U
PE
I
C
H
VE
N
L
C
O
G
A
R
B
R
A
GDP
AFCH
GFCF
63
Relative Per Capita-LAC = 100
200
GDP
AFCH
GFCF
150
100
50
The World Bank
R
U
PE
I
C
H
VE
N
L
C
O
G
A
R
B
R
A
0
64
Consumption Expenditure Shares
Africa =100
25
20
EXP
15
10
5
0
SA EGY NIG SUD MOR Tun
The World Bank
65
Consumption Expenditure per
capita relative
Africa =100
400
300
Per
Cap
200
100
The World Bank
Tu
n
SU
D
M
O
R
N
IG
Y
EG
SA
0
66
Purchasing Power Parity between
Two countries
(3)
The World Bank
 n jk pik 

PPPjk   
 i 1 p 
ij 

1
n jk
67
Statistical basis of PPPs
N
155

GDP country A =
i 1
GDP country B
=
PAij QAij
j 1
155
N
i 1
j 1

PBij QBij
Exchange rates or PPPs ?
Direct comparisons of country A with country B:
GDP country A
=
using B prices
The World Bank
155
N
 P
Aij
i 1
j 1
. (PBij / PAij ). QAij
68
The Steps
Region
Africa—48
Asia—23
Regional 1000
Regional 778
Housing,
Gov’t comp,
Equipment,
Construction
specs
Global
Global
LAC—10
W. Asia—11
CIS—10
EU/OECD
Regional 678
Regional 862
Regional 740
Regional
Global
Global
Regional
Regional
The World Bank
Consumption
Specifications
And number of
Products priced
Within
region
PPPs
PPPs Africa
PPPs
Asia
PPPs LAC
PPPs W. Asia
PPP CIS
PPP Eurostat/OECD
69
Convert regional PPPs to Global Level
Region
Africa—48
Asia—23
LAC—10
Consumption Housing,
specifications Gov’t comp,
Equipment,
Construction,
specs
Regional
Global
Regional
Global
Regional
Global
W. Asia—
11
CIS—10
EU/OECD
Regional
Global
Regional
Regional
Regional
Regional
Ring
Program
Global specs, Global specs
composite of from above
regions--1086
The World Bank
Within
region
PPPs
Ring countries
PPP af
PPP as
PPP
lac
PPP
wa
PPP cis
PPP
eu/oe
6
4
2
2
*(Russia)
2
Between region
PPPs
70
Methodology to Link Regional BH PPPs
RegionCountry
1-a
1-b
1-c
1-d
1-e
1-f
Within
region
PPP
PPPa = 1
PPPb
PPPc
PPPd
PPPe
PPPf
2-g
2-h
2-i
2-j
2-k
PPPg =1
PPPh
PPPi
PPPj
PPPk
3-l
3-m
3-n
3-o
PPPl =1
PPPm
PPPn
PPPo
The World Bank
Ring
Prices
Ring prices in
regional
currency
RPb
RPb/PPPb
RPe
RPe/PPPe
RPi
RPi/PPPi
RPk
RPk/PPPk
RPm
RPn
RPm/PPPm
RPn/PPPn
Between
Region PPPs
Global
PPPs
PPP1 = 1
PPPa
PPPb
PPPc
PPPd
PPPe
PPPf
PPP2
PPP2*PPPg
PPP2*PPPh
PPP2*PPPi
PPP2*PPPj
PPP2*PPPk
PPP3
PPP3*PPPl
PPP3*PPPm
PPP3*PPPn
PPP3*PPPo
71
A Complication
• Gaps - not all types of rice are sold in all
countries
A/B rice PPP may be based
on a different set of rice products from the A/C
and B/C rice PPPs
• Set of PPPs will not be consistent with each
other. They are not “transitive.” PPPA/B ≠
PPPA/C * PPPC/B
• Comparison between any two countries should not depend upon
choice of base country
The World Bank
72
Calculate Basic Heading Parities
Parities are calculated
from average prices in
national currency for
products in each of 155
basic headings of the
GDP
The World Bank
Prices by Country
Rice
A
B
C
100
Long grain
10
40
Short grain
12
16
Parboiled
15
15
Imported
25
30
100
73
Method to make direct
parities = indirect parities
EKS jk
The World Bank
n PPP 

jl
2
  PPPjk  

l  j , k PPPkl 

1
n
74
Moving from Bilateral to Multilateral
The parity between A and B can be made transitive
by using the indirect comparisons between other
countries:
•
•
•
The World Bank
Comparison of country A and C (C/A)
Comparison of country B and C (C/B)
The ratio of these two (C/B)/(C/A)=B/A
which is an indirect estimate of the parity
between A and B
75
Gross Domestic Product
• Represents size of a country’s economy and
structure
• Per capita measures provide evaluation of
economic well-being
• Compare sizes and components such as
investments, between countries to evaluate
growth and development
• Compare income--$1/per day for poverty
comparisons.
The World Bank
76
Inter country comparisons of Agricultural
measures
• Total value of production
• Per capita
• TVP / GDP comparisons across
countries.
The World Bank
77