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More about Purchasing Power Parities

Price, volume and value measures

Purchasing Power Parities (PPPs) are currency converters that equalise the purchasing power of different currencies by eliminating the differences of price levels between countries.  Thus in their simplest form, PPPs are price relatives that show how many units of each currency that are needed to give the same purchasing power in each country.

PPPs eliminate differences in price levels across countries; hence only differences in the volumes produced in the countries remain. The main purpose of PPPs is to make inter-country volume comparisons of gross domestic product, GDP, and its expenditure aggregates, i.e. to compare economic welfare, investment, productivity etc. across countries.

If exchange rates are used as currency converters, not only volume differences will be depicted across countries but also differences in price levels. GDP converted with exchange rates continue to be valued at national price levels and hence are nominal measures, i.e. merely measures of value. GDP converted with PPPs are real measures and hence measures of volume.

PPPs also enable international price level comparisons. The Price Level Index, the ratio of Purchasing Power Parities to exchange rates, is a measure of how expensive a country is compared to another country.

Organisation of comparisons

The Purchasing Power Parity programme is an international co-operation involving the World Bank (initiated by the UN), the OECD, the EU and the National Statistical Institutes of the participating countries. The International Comparison Programme, ICP, managed by the World Bank, runs at a global level. At regional levels, the following programme are in question;

  1. OECD’s Purchasing Power Parity Programme involving its non-European Member States.
  2. Eurostat’s European Comparison Programme (ECP) involving Member States of the EU and its candidate countries and the three EFTA Member States Norway, Switzerland and Island.

Sweden participated in the 1985 and 1990 years’ surveys organised by the OECD, but since 1991, Sweden is a member of the ECP. In order to facilitate the organisation of the consumer price surveys, Eurostat has divided the participating countries into four groups with one of the countries in the group acting as group leader. Sweden belongs to the Northern Group which also includes the Nordic countries, the Baltic countries and Poland.   

The obligation for the National Statistical Institute of each country is to collect national price data. Statistics Sweden has among other data delivered prices to Eurostat regarding private consumption of goods and services, government services, equipment goods and construction projects. The OECD has the responsibility to co-ordinate the surveys between the OECD group and the Eurostat groups. The data collection is made according to a rolling scheme over three years.

Purchasing Power Parities are compiled for 224 basic headings covering GDP. Each basic heading contains a sample of different goods and services which should be comparable between countries as well as representative of the countries domestic expenditures. The latter requirement is to avoid biased PPPs. The calculation of PPPs is made in two stages: unweighted PPPs are calculated at the basic heading level followed by a weighted aggregation of all basic headings PPPs up to the level of GDP.

Eurostat and OECD use the Èltetö-Köves-Szulc (EKS) method to calculate PPPs. The method is especially useful for price and volume comparisons across countries at lower levels of aggregation, such as food and beverages, clothing and footwear and gross investments. One disadvantage with the EKS method is that it does not provide real final expenditures that are additive, i.e. the total sum of the real final expenditures does not equal the sum of its components. Comparisons of structures or proportions should therefore be made with caution.

More detailed information about the use and the calculation of PPPs can be found in the manual

EUROSTAT – OECD Methodological manual on purchasing power parities

Publication of Purchasing Power Parities

Eurostat publishes PPPs and Price Level Indices at GDP level as well as for lower levels of aggregation, e.g. food and beverages. Preliminary PPPs are published with one year lag; semi-preliminary with two years lag and final PPPs with three years lag. The results are published yearly in December in Eurostat’s Statistic in Focus series and in Eurostat’s database. Eurostat also publishes specific result concerning household’s individual consumption with one year lag.

OECD publishes monthly Price Level Indices on GDP level in the Main Economic Indicators series.

Comparisons of Price Level Indices of different years must be made with caution, especially at lower levels of aggregation where sample sizes are small and any changes in the composition of the basket of goods and services between survey years can affect the result.