A user perspective on purchasing power parities Interpreting PPPs and PPP-based indicators

Transcription

1 A user perspective on purchasing power parities Interpreting PPPs and PPP-based indicators EFTA Training Course on Price Statistics Tbilisi, June 2017

2 Why a user perspective on PPPs? Users are often confused about the proper interpretation of PPPs and PPP-based indictors PPPs are sometimes used where they should not be used or they are not used where they should be used National Statistical Institutes provide input data to the PPP production process, but are usually not involved in the calculation and publication of results (ICP, OECD, Eurostat) This can lead to a feeling of lack of ownership in the results, to low priority at the national level, and a sense of "alienation" with the output of the PPP programme

3 Why a user perspective on PPPs? Focus of this presentation is to stimulate reflection on: (1) How to interpret the main outputs of the PPP exercise Purchasing power parities (PPPs) Price level indices (PLIs) Spatial volume indicators "GDP per capita in international dollars" (ICP, OECD) "Consumption in purchasing power standards" (Eurostat) "Real expenditure on education" (OECD, Eurostat) (2) When to use and not to use PPPs and PPP-based indicators

4 Purchasing power parities and price level indices

5 Purchasing power parities what are they? Price indices in a spatial dimension While CPIs compare prices at points in time (temporal dimension), PPPs compare prices at points in space (spatial dimension) Purchasing power parities (PPPs) are indicators of relative price levels between countries or other "points in space" The bilateral PPP between country A and country B shows the number of units of country A's currency needed in country A in order to purchase the same amount of goods and services that can be purchased for a given number of country B's currency units in country B

6 Purchasing power parities what are they? In its simplest form, a PPP is simply a price relative for a given product between two points in space (countries) Product A costs 10 francs in Switzerland and 100 kroner in Norway. What is the PPP between Switzerland and Norway? 100/10=10 with Switzerland as base country 10/100=0.1 with Norway as base country This means that 10 kroner in Norway buys the same amount of product A as 1 franc in Switzerland and 0.1 franc in Switzerland buys the same amount of product A as 1 krone in Norway

7 Purchasing power parities what are they? Aggregate PPPs are calculated and published according to the expenditure classification of national accounts If the aggregate PPP for Norway is and for Switzerland 1.671, this means that kroner in Norway buys the same amount of goods and services as francs in Switzerland with EU28 as base "country" (EU28=1) Users may prefer a specific base country PPP(NO/CH) = / = PPPs can be interpreted as the exchange rate of an artificial currency which equalizes the purchasing power across countries

8 Price level indices what are they? A more user-friendly way of presenting relative price levels A price level index (PLI) is simply the PPP of a given country converted into the currency of the base country PLI NO/EU = PPP NO/EU 100 = = 145 XR NO/EU The interpretation of this is that we will need 145 euros in Norway in order to buy the same "basket of goods" that would cost us 100 euros in the EU so the price level in Norway is 45 percent higher than the EU average

9 PPPs and PLIs points to keep in mind PPPs are always relative. To say that the PPP for Norway is doesn t make sense unless we also know that the PPP for Switzerland is or that both PPPs are calculated on the basis of EU=1 PPPs are not multi-dimensional they are not designed to measure spatial and temporal price differences simultaneously PPPs are published at the level of GDP, the main NA aggregates, and several sub-aggregates. Which PPP to apply must be carefully considered in view of the purpose of the analysis

10 PPPs and PLIs points to keep in mind Given that PPPs are spatial indicators, a time series of PPPs should be interpreted with caution. It cannot be expected to directly reflect domestic price change as measured by the CPI However, domestic price change relative to the base country should approximate the change in the PPP from one year to the next: PPP n,t = PPP n,t 1 CPI n,t/cpi n,t 1 CPI 0,t /CPI 0,t 1 But don't expect to replicate the published PPP exactly!

11 PPPs and PLIs points to keep in mind PLIs are sensitive to exchange rate movements PLI = PPP / XR Appreciation (depreciation) leads to higher (lower) PLI This effect is immediate and makes a country more (less) expensive seen from abroad The counterbalancing external trade effect (via import prices) is less immediate and depends on the structure of trade

12 PPPs and PLIs points to keep in mind PPPs and PLIs don't directly reflect domestic price change When prices in country A increase, its PPP and PLI will still go down if prices increase even more in the base country B When prices in country A decrease, its PPP and PLI will still go up if prices decrease even more in the base country B This relative nature of PPPs and PLIs is hard to communicate to users!

13 Price level adjustment and spatial volumes

14 Spatial volume indicators why and how? Need to ensure international comparability of GDP and other national accounts aggregates GDP conversion using nominal exchange rates will overstate the GDP of countries with high price levels relative to countries with low price levels Expenditure = Volume x Price GDP conversion using PPPs ensures that each country's GDP is restated at a common price level, enabling us to compare spatial volumes (or real expenditures, expenditures in international dollars, purchasing power standards )

15 Spatial volume indicators why and how? Actual individual consumption per capita, EU28=100. Source: Eurostat

16 Spatial volume indicators why and how? Price level adjustment works like any other currency conversion: Nominal GDP (national currency) PPP Real GDP (PPS) Population (mill.) GDP per capita (PPS) Volume index per capita A B C = A / B D E = C / D F EU28 14,707, ,707, ,394 28, France 2,181, ,035,695 66,624 30, Germany 3,032, ,926,924 81,687 35, Hungary 33,999, ,248 9,843 19, Poland 1,798, ,112 37,986 20, The figures in columns C and E are expressed at a common price level: They are denominated in purchasing power standards (Eurostat terminology) If we say that "GDP per capita in France is 30,555 PPS" we should always specify the value of the base country (here: 28,873) Or preferably: Use the volume index per capita in column F ("GDP per capita in France is 6 percent higher than the EU average")

17 Spatial volume indicators points to keep in mind PPPs should be applied only in international comparisons, and only in analyses of GDP levels rather than GDP change A time series in current, national prices deflated by current PPPs produces a time series in current, common prices avoid calculating growth rates A time series in fixed, national prices deflated by fixed PPPs produces correct growth rates but also a bias to the spatial comparison PPP statisticians speak of "volumes" in a spatial sense, national accountants in a temporal sense and this can cause confusion!

18 Use and misuse of PPP statistics

19 PPPs in national accounts PPPs are produced and best used within the NA framework, primarily as spatial deflators of GDP and underlying aggregates In per capita measures (GDP per capita, consumption per capita) indicators of individual welfare PPPs clearly recommended In measuring the size of economies, i.e. total GDP Relevance of PPPs depending on the purpose of the analysis ICP: "market exchange rate converted GDP does not accurately measure the relative sizes of economies" Do you agree?

20 PPPs in national accounts The two charts below show each major country's share of world GDP. In your view, what do they express? GDP 2015, USD. Source: World Development Indicators GDP 2015, "international dollars". Source: World Development Indicators

21 PPPs in national accounts Comparing spatial volumes of NA aggregates below the level of GDP (e.g. health, education) poses a special challenge: Health expenditure / health PPP = spatial volume of health services Recommended in sector-specific analyses No productivity indicator! Shows the volume of health services each country gets from whatever level of expenditure they choose to allocate to health services Health expenditure / GDP PPP =? An opportunity cost how much of GDP do we give up for our health service, relative to other countries Recommended if additivity is a concern

22 PPPs in price level analyses PLIs are designed to measure price level differences across countries. As such, they are highly recommended for the purpose. Still, there are some points that should be kept in mind: PLIs at the level of GDP and total consumption include several areas where the exact measurement of prices is difficult (non-market services, dwelling services, capital investment) PLIs are probably most reliable (and easiest to communicate) in the areas which are covered by "ordinary" price surveys (food, clothing and footwear etc.) If PLIs are used in time series, users should be informed about the exchange rate impact and the link between PLIs and domestic price development

23 Other potential uses and misuses A common misunderstanding is that PPPs and PLIs measure "price levels when salaries are taken into account" An alternative can be to measure "salary levels when prices are taken into account", using PPPs as deflators for salaries But remember that the PPPs are not designed for that purpose PPPs do not indicate "what the prices should have been"! PPPs can be interpreted as indicators of currency overvaluation or undervaluation, but published PPPs are not designed for that

24 Main points to keep in mind PPPs (and PPP-based indicators) are always relative and only relevant in international comparisons PPPs are spatial indicators and are not designed to measure prices in time and space simultaneously Adjusting national accounts aggregates for differences in price levels enable us to compare relative volumes across countries Applying current PPPs to current expenditures produces a time series in common, current prices and hence do not reflect real growth

25 Sources of data and information International Comparison Programme (ICP): data, manuals, methodological papers etc. World Development Indicators: databank covering various topics, PPP data mostly at GDP level Eurostat: select "economy and finance", then "prices". Comprehensive, detailed data for most European countries Eurostat-OECD Methodological Manual on PPPs

26 Thank you for your attention! Lars Svennebye EFTA Statistical Office