Transcript PPPs Wellington Feb2004

OECD PPP Meeting Wellington
February 2004
The PPP Programme and the
Uses of PPPs
Paul Schreyer OECD
1
Upfront…
PPPs are not a concept that is immediately and
easily grasped by users (everything is relative,
unclear links with national accounts and national
price indices). This has generated a fair bit of
mis-understandings
PPPs are used for purposes for which they are
not suited
PPPs are not used even when they are the
right concept
2
Contents
1. What are PPPs?
2. The PPP programme
3. Uses of PPPs
3
1. What are PPPs?
PPPs are price relatives calculated in three stages:
 first for individual products (tomatoes)
 then for product groups (food)
 finally for aggregates (PHC, GDP)
the weights for aggregation are provided by
the National Accounts
PPPs are spatial price indices that allow “real”
volume comparisons across countries
4
2. The organisation of the PPP programme
Eurostat
Northern group
Central group
• Finland
• Denmark
• Estonia
• Iceland
• Ireland
• Latvia
• Lithuania
• Norway
• Sweden
• UK
• Austria
• Belgium
• Czech Rep.
• Germany
• Hungary
• Luxembourg
• Netherlands
• Poland
• Slovak Rep.
• Slovenia
• Switzerland
OECD
Southern group
• Italy
• Bulgaria
• Cyprus
• France
• Greece
• Malta
• Portugal
• Romania
• Spain
• Turkey
Pacific countries
• Australia
• Canada
• Japan
• Korea
• Mexico
• New Zealand
• United States
• Israel
Non-OECD
members
• Croatia
• Macedonia
• Russian Fed.
• Ukraine
5
Basic requirements from countries
A set of national annual prices for a selection of
products chosen from a common basket of goods
and services
 the basket consists of about 3000 goods and
services
 these products should be both comparable
and representative
A breakdown of national expenditures
6
Selection of products for the basket
The basket of goods and services is a sample of all
goods and services covered by the GDP
 for individual consumption of households : surveys on
consumer goods and services (e.g., Food, beverages and
tobacco; Transport services; Rents)
 for gross fixed capital formation : surveys on construction
projects, equipment goods...
 for government consumption : surveys on salaries
7
How are products chosen?



Product lists
Products have to be :
 representative of the consumption patterns
 comparable between countries
Lists established in co-operation
 between Eurostat groups
 with ‘Pacific-rim’ countries
8
How are PPPs calculated?
PPPs are price relatives calculated in three stages
I: prices relatives for individual products
II: price relatives for product groups by averaging the price
relatives for individual products
III: price relatives for aggregates by weighting and averaging
the price relatives for the product groups
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3. Uses of PPPs: a traffic light approach
1. Areas where PPPs are well placed
2. Areas where PPPs may be used but with
limitations
3. Areas where PPPs should not be used
10
Areas where PPPs are well placed
Main indicators:
1. Volume comparisons of GDP
- GDP per capita
- GDP per hour worked
- Size of economies
2. Comparisons of relative price levels
11
GDP per capita
Generally: compare with care…
• PPPs are a useful instrument but with limited
precision
• Small differences between countries should not be
over-interpreted
• Results may change due revisions in GDP and
population data
• Example: GDP per capita across OECD countries
12
1999 ‘Benchmark’ Results: GDP/head
13
Ic
el
an
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C
N
et ana
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rla a
nd
ire s
la
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A
us
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ia
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B
el n
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A any
us
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U
en
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Fi m
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Fr d
an
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ZL
Sp
Po ain
rt
ug
G al
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e
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ch Ko
Re rea
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b
H lic
un
ga
ry
1999 Results: Middle income group
(Information set: December 2003)
450 $
120
100
80
60
40
20
0
14
1999 Results: Middle income group
(Information set: December 2003)
5158 $
120
100
80
60
40
20
0
l
y
a
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d
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s
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ga
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N
1999 Results: High middle income group
under two information sets
Jan-02
Jul-03
130
120
110
100
90
80
70
60
50
40
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GDP per capita
• A measure of output, and with some
reservations, a measure of economic wellbeing (NDP per capita and PPPs for NDP?)
• EU: allocation of structural funds
• OECD: no use for membership fees but
• Analysis: from GDP per capita to GDP
per hour worked: a useful analysis
• Statistics: zone totals
17
Effect of (%)
GDP per WorkingLabour
capita
Unage
force
to
(US = population
employworking-age
100)
ment
(15-64
population
years) to
GDP per
hour
Working
worked
hours (US = 100)
GDP per
person
employed
(US = 100)
(7)
(8)
(1) - (6) (1) - (2) - (3) - (4)
(1)
(2)
(3)
(4)
(5)
Canada
Mexico
United States
85
26
100
3
-2
0
2
-5
0
-2
1
0
-2
1
0
84
31
100
82
32
100
Australia
Japan
Korea
New Zealand
76
74
48
61
0
1
3
-1
0
2
-6
1
0
0
1
0
0
-1
12
0
76
72
37
61
77
72
49
61
Sweden
Total OECD
74
75
-2
0
2
-3
0
0
-11
-2
85
81
74
78
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Size of economies
Slovak Republic
New Zealand
Norway
Switzerland
Based on PPPs
Based on exchange
rates
Sweden
Turkey
Australia
Korea
Spain
Canada
Mexico
4
3
2
1
0
1
2
3
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4
Comparative price levels (1)
CPL is intuitively familiar to any international traveller:
comparison between the relative prices of the same product
at home and abroad and the market exchange rate.
Example:
•
NZL traveller pays hotel room in Chicago: 100 USD
•
Traveller’s calculation whether this is “expensive” or not:
Convert 100 USD into NZD with market exchange rate,
say 1.5 NZD/USD: 100 USD*1.5 NZD/USD = 150 NZD
•
Take price of an equivalent hotel room in Wellington.
20
Comparative price levels (2)
•
If the equivalent hotel room there costs 100 NZD, the
traveller will perceive the price level for hotels in the
United States as high compared to Wellington.
•
Thus, travelling in the USA is ‘expensive’ if the PPP for
hotel rooms (100 USD/100 NZD=1 USD/NZD) exceeds
the exchange rate (1 USD/1.5 NZD=0.67 USD/NZD) and
vice versa.
•
Comparative price level = PPP/Exchange rate
•
Thus, CPL varies with exchange rates
•
This has to be kept in mind whether observing CPLs over
time
21
Comparative price levels (3)
A look at New Zealand
New Zealand’s and Australia’s price levels compared to
the United States…
NZL
Australia
United States
NZD
AUD
USD
1999
76
83
100
2000
65
76
100
2001
52
68
100
2002
68
73
100
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Areas where PPPs may be used but with
limitations
• Cost of living index across countries
• Time series analysis of relative GDP per
capita
• Analysis of price convergence
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Cost of living index yes, but…
• Relative price level of actual final
consumption
• For average consumption patterns of
resident population Not for expatriates
• Some important aspects of prices of private
consumption are inadequately covered, in
particular housing (volume index)
24
Time series analysis of relative GDP or price levels
(1)
• Take NZL’s per capita GDP relative to that of the
OECD as a whole in 1996
• Multiply that measure by the rate of GDP growth
for NZL relative to that of the OECD as a whole
between 1996 and 1999 and divide by the relative
population growth
• Surely, the resulting GDP per capita index for NZL
for 1999 corresponds to the one that comes
directly out of the 1999 survey?
25
Time series analysis of relative GDP or price levels
(2)
• Unfortunately, no. And this is a source of much
discussion
• Even more so as this is what policy makers want to
know: where does my country stand relative to
others and how has its position evolved over time?
• Why are there differences?
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Time series analysis of relative GDP or price levels
(3)
• The first calculation used fixed PPPs (fixed 1996
international prices)
• The second result comes from the 1999 survey and
thus reflects current 1999 international prices
• One source of differences are thus changes in price
structures
• But there are other sources. Here is an important
one, the underlying samples
27
Differences in samples: price indices underlying national
accounts and PPPs
CPI sample in
period t
t+1/t
CPI sample in
period t+1
t+1/t
PPP sample in
period t
PPP sample in
period t+1
28
Time series analysis of relative GDP or price levels
(4)
• PPP samples tend to be small and change over
time: this makes the temporal comparison of price
levels difficult. But PPP samples are conceived to
maximise comparability of items across countries.
• Samples for temporal price indices tend to be
larger and conceived to maximise comparability
over time within a country. But they are not set up
to deliver international comparability of items.
• Thus, when PPP samples change over time, it
makes little sense to compare prices over time.
29
Time series analysis of relative GDP or price levels
(5)
• OECD recommends constant PPPs for time-series
analysis (but note trade-off between advantage of
national accounts consistency and disadvantage of
imposing constant international price structure)
• How about NZL, then?
• Despite some differences between series based on
constant and current PPPs, the discernable trends
are very similar  change in NZL’s relative
position of GDP/head is not a PPP issue
30
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
105
100
Constant PPPs
95
90
Current PPPs
85
80
75
31
Time series analysis of relative GDP or price levels
(6): Example Norway and oil prices
165
155
Constant PPPs
145
135
125
115
Current PPPs
105
95
85
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
75
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Analysis of price convergence
• In principle, the spread of prices over time can be
used to make a statement about price convergence,
in particular in the Euro area
• But: does not make sense for all products (e.g.
non-tradeables) – special basket may be needed
• Also: small sample size in PPP surveys, such
convergence cannot be measured at product level
• Also: which prices are expected to converge? How
to account for taxes and subsidies?
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PPPs are not recommended…
1. As an indicator for the over- or under-valuation of
a currency
2. As a precision tool to establish rankings between
3. As a measure to generate output and productivity
comparisons by industry (unless there are
industry-specific PPPs)
4. As a way of constructing national growth rates
5. As a ‘volume’ measure of exports or imports
across countries
34