Transcript Purchasing Power Parities: Statistics to Describe the World

International Comparison
Program
(ICP)
2003-2006 round
http://www.worldbank.org/data/icp
Content
1) Overview of ICP
2) ICP Methodology
Overview of ICP
1. What is ICP?
2. Background for PPP
3. Issues related to using exchange rates for
conversion to common currency
4. How do PPPs solve the conversion issue
5. Why we need PPPs
6. ICP 2003-2006 round
7. New initiatives
1. What is ICP?
The ICP is a global statistical program established in
1968 by the United Nations and University of
Pennsylvania to compare GDP and its components
using Purchasing Power Parities (PPPs) rather than
exchange rates
The program provides a platform for statistical
capacity building in developing countries
2.1 Background for PPP
GDP & its components
Represent the size of a country’s economy
Per capita measures help evaluate economic well-being
Allow us to evaluate both growth and development by
comparing size of economy and expenditure
components across countries
Allow us to monitor progress of poverty reduction
policies
2.2 Background for PPP cont’d…
Country level statistics are in national currencies and
need to be converted to a common currency for
comparisons
What are the limitations of using exchange rates for
comparison and analysis?
3.1 Issues related to using exchange rates for
conversion to common currency
Exchange rates
do not reflect relative price levels in countries, so
estimates of income levels calculated are inconsistent
do not move with changes in relative prices,
comparisons are therefore inconsistent over time
distort the structural relationships of GDP’s major
expenditure components
3.2 Exchange rates cont’d…
Exchange rates are unsuitable for regional or global
policy decisions because
currency speculation and short-term capital
movements cause exchange rates to fluctuate
Exchange rates are fixed by policy in some countries
Exchange rate fluctuations make some countries
appear “richer” or “poorer” almost overnight – with no
change in the volume of production
4. How do PPPs solve this conversion
issue?
PPP is defined as the number of units of a country’s
currency required to buy the same basket of goods and
services in the country as, say, one US$ would buy in
the US
PPPs account for price differences and are therefore
suitable for comparing relative command over
economic resources
5.1 Why the international community
needs PPPs
PPPs underpin the Millennium Development Goals and
attempts to measure progress in poverty reduction
PPPs are used widely in economic and social
development research
PPPs are commonly used to explain comparative
growth rates, competitiveness in world trade, and
patterns of specialization among industries
5.2.Why PPPs are needed for analyzing
the private sector?
Rapid globalization and the integration of
international markets and financial institutions have
resulted in a new demand for PPP data
Multinational companies are increasingly demanding
internationally comparable data to obtain information
on competitiveness
PPP data are commonly used to compare market size
and to assess differences in cost of production across
countries
5.3 Why International Organizations
Need PPPs
World Bank used PPPs to establish international poverty
lines
UNDP uses PPPs to construct the Human Development
Index or HDI
World Health Organization uses PPPs to compare health
expenditure
UNESCO uses PPPs to assess education expenditure
UNICEF uses PPPs to monitor the welfare of children
IMF uses PPPs to compare the relative sizes of economies
and to estimate weighted averages of regional growth rates
6.1 ICP 2003-2006 round
108 countries are participating in the global program
45 countries in the Eurostat-OECD PPP Program are
also participating
Global PPPs will be prepared by the ICP global office
by combining ICP regional PPPs with the EurostatOECD program’s PPPs via the ‘Ring Comparison
Program’
Price collection surveys begin in the first quarter of
2005
Preliminary results will be published in 2006
6.2 New framework for ICP 2003-2006
round
New coalition of stakeholders and cost-sharing agreement
Synergy between ICP and National Statistical Programs
Congruence of national, regional and international interests
New governance arrangement
Executive Board guides implementation
Technical Advisory Group helps resolve technical and
methodological issues
Broad partnership & cost-sharing arrangement
IMF,UNSD, UNDP, ADB, AfDB, ESCWA, ECLAC,
CARICOM, OECD, Eurostat, Statistics Canada, DFID,
ABS, ONS (UK), WHO, ILO, UNESCO
6.3 2003-2006 Governance
Arrangement
Endorsed by the UNSC in 2002 the 2003-2006 round’s
governance structure includes:
The ICP Executive Board
International Secretariat /Global Office
Technical Advisory Group
Regional Governing Bodies
Regional Secretariats/Regional Coordinating Offices
National Implementing Agencies
6.4 2003-2006 Regional Coordinators
Africa
African Development Bank
Asia Pacific
Asian Development Bank
(with technical assistance from the Australian
Bureau of Statistics
CIS
Federal Service on State Statistics (Rosstat),
Russia; Interstate Statistical Committee, CIS;
Bureau of Economic Analysis Foundation,
Moscow;
Latin America
Economic Commission for Latin America
and the Caribbean (ECLAC); Statistics
Canada
Western Asia
United Nations Economic and Social
Commission for Western Asia (UN ESCWA)
6.5 2003-2006 Regional Coordinators
cont’d…
Central America
Economic Commission for Latin
America and the Caribbean
(ECLAC)
Pacific Islands
Australian Bureau of Statistics
Eurostat- OECD/ PPP Program
Eurostat; Organization for Economic
Cooperation and Development
(OECD)
7.1 2003-2006 new initiatives
Structured Product Description
ICP Tool Pack
ICP Handbook and Operational Manual
National Capacity Building initiative
PPP for the Poor – research into strategies to generate
poverty specific PPPs and incorporation of PPPs for
poverty measurement into mainstream ICP work
7.2 Structured Product Description (SPD)
A new approach adopted to identify products to be
priced in ICP surveys using a list of price-determining
characteristics
Objective is to facilitate cross country comparison of
prices of ‘like’ products that are truly representative of
the countries in question
Coding structure of US Bureau of Labor Statistics,
Classification of Individual Consumption According to
Purpose (COICOP) and OECD combined to develop
Structured Product descriptions
Total of 830 SPDs created for 100 consumption Basic
Headings
7.3 ICP Tool Pack
New software developed in the 2003-2006 round to help
compile, analyze and review price data
Available in 6 UN languages
Distributed free of charge to countries participating in
the International Comparison Program
Provides a powerful data management capability to
store and analyze price data
Standardizes price collection methods within and
across countries
Facilitates data archiving, analysis and dissemination
May be used to support the Consumer Price Index
(CPI) program in countries
7.4 ICP Handbook and Operational
Manual
New guides explain the methodology used to collect and
analyze data for the computation of PPPs
Aimed at professional economists and statisticians
working at all levels in National Statistical Offices and
the various international and regional agencies
involved in the program
Available at http:// www.worldbank.org/data/ICP
7.5 National Capacity Building
Initiative
ICP provides a comprehensive and an integrated
platform for statistical capacity building
The program has been adopted as a flagship for
regional statistical capacity building initiatives in Asia
and Africa
Since the data are basic in character (for example, GDP
expenditures, consumer prices) they have top priorities
in statistical development programs both at the
national and international level
7.6 PPPs for Poverty Measurement
Three pilot studies are underway to develop a methodology for
producing PPPs and price indices that can be used for both crosscountry and within country poverty analysis
Bilateral comparisons between India & Indonesia
Guatemala & Mexico
Ethiopia & Ghana
Work is underway
to establish a correspondence between ICP expenditure
classification and common elements in Household Expenditure
Surveys (HES)
to supplement HES unit values with ICP prices, while using HES
expenditure weights
to include products particularly relevant for the poor in SPDs
ICP Methodology: calculating
PPPs
Step1: Start with main GDP expenditure components
Step 2: Break down GDP aggregates into 155 Basic Headings
Step 3: Create SPDs
Step 4: Create Product Specifications
Step 5: Collect prices
Step 6: Calculate national average prices
Step 7: Compute basic heading parities
Step 8: Aggregate basic heading PPPs to GDP
Step 9: Link regional PPPs to get global PPP
Step 1
Start with main GDP expenditure components –
Individual consumption by households
Individual consumption by NPISH
Individual consumption by government
Collective consumption by government
Capital formation
Change in inventories
Trade balance
Breakdown of ‘Individual Consumption by
Households’
Food & non-alcoholic beverages
Alcohol and tobacco
Clothing & footwear
Housing, water, electricity
Health
Education, etc.
Step 2
Divide GDP expenditure
components into 155 Basic
Headings; example: Food
Rice
Other cereals
Pasta
Beef & veal
Fish & seafood
Fresh milk
Fresh fruit
Fresh vegetables
Oils
Eggs
Sugar, etc.
Basic Headings
A Basic Heading is the lowest level of detail for which
expenditure weights can be provided
ICP Products are grouped at the Basic Heading level
Prices are collected for individual items to compute
National Annual Average Prices
PPPs are first calculated at the Basic Heading level
Expenditure weights at the Basic Heading level are
used to aggregate the PPPs to higher levels of the GDP
to the overall final level.
Number of products in a basic heading
Depends on how homogeneous a product is within a
Basic Heading
Example: milk and eggs are more homogeneous
than fish and sea food
Time and cost are important factors in decisions
regarding number of products to price
Minimum 5 per Basic Heading
Step 3
Create SPDs
All countries in a region price products from the same
basket of goods and services
SPDs ensure that every country is pricing comparable
products
Fresh Milk Structured Product Description
Where sold
Organic certification
Sold at store
Dairy delivered to home x
Government crtified
B2 organic
B3 Other organic claim
Type
Fat content
Cow
Buffalo
Goat
Camel
Other
Whole milk
3-4% fat
1-2% fat
non fat
Brand
x
Type
x
x
Fortified
F1 (Vitamins added)
F2 Not fortified
x
Processing
Pasturised
Not pasturised
x
Also include
Package
Types and
Units of measure
Step 4
Prepare Product Specifications
Each region selects relevant characteristics from the
SPDs to describe representative products in their
region
Examples of product specifications for
milk
Cow milk/3-4%fat/pasteurized
Cow milk/nonfat/pasteurized
Buffalo milk/whole/ not pasteurized
Goat milk/whole/not pasteurized
Step 5
Collect prices
Price collection surveys take place in participating
countries
ICP uses National Annual Average prices
Multiple price collections during the year (depending
on product)
ICP utilizes CPI framework where possible
ICP basket is usually more broad based than CPI
baskets
ICP usually covers a wider geographic area within a
country than CPI
Step 6
Compute National Average Prices
Unweighted in the case of self-weighting sampling
frame
Weighted arithmetic mean if regional and quarterly
weights are known
Step 7 (a)
Compute Basic Heading Parity—simple example
Prices by Country
Product A
1
10*
2
12*
3
15
4
25
B
40
16*
!5*
Price Ratios
C
100
30*
100*
Geometric Means
Mean using direct and
indirect ratios
B/A* C/A C/B
4
10
4
1.25
1
2
2
4
(C/A)/(C/B) is indirect
estimate of B/A
1.71
1.76
Step 7 (b)
Example of computation of BH parity with CPD
Original Prices
Product
1
2
3
4
A
10
12
15
25
Prices w/ filled-in gaps
B
40
16
15
C
100
30
100
Product
1
2
3
4
A
10
12
15
25
B
C
40
100
16
43.32 =10.5x4.12
15
30
42.81 100
=24.6x1.74
CPD regression coefficients
Countries
A
B
C
BH parity
1
1.74 4.12
1
Average product prices 17.7
Products
2
3
10.5
9.8
4
24.6
Step 7 (continuation)
List of elementary indices to arrive at the BH
parities:
EKS (Elteto-Koves-Sulc)
EKS – Star (variation of the above)
EKS-S (EKS-Sergeev)
CPD
(Country-Product-Dummy regression)
CPRD (Country-Product-RepresentativityDummy regression)
Basic Heading Parity Issues
Missing data—countries are not able to price every
item in the basket
Poor quality data in one country affects other
countries
Countries have to collect prices for products
important to other countries
Availability of weights
Refer to: Chapter 10 “Estimation of PPPs for Basic
Headings”, ICP Handbook 2003-2006
Available at http://www.worldbank.org/data/icp
Step 8
Aggregate Basic Heading PPPs to GDP
Indices used for the purpose:
Non-Additive Indices - EKS, Tornquist and others
Sum of GDP components does not add up to total GDP
Treat countries equally
Minimize substitution bias
Additive Indices - Geary-Khamis, IKLE and others
Sum of the GDP components adds up
Large countries exercise more influence in the comparison if
Geary Khamis is used; all countries are treated equally if
IKLE is used
Geary Khamis has substitution bias; IKLE has a negligible
amount of substitution bias
Step 9
Link regional PPPs using ‘Ring Comparison’ approach to get global
PPPs
Ring Comparison is a multilateral approach used to link regional
PPPs with the objective of generating global PPPs
This approach requires a selected number of countries from each
region to participate in a separate comparison organized
specifically to provide a link between regions
The ‘ring countries’ will price a common global ring product list in
addition to their individual regional lists. This approach provides
the most robust link between regions because products can be
matched between ring countries in any pair of regions
Regional Vs Global Comparisons
Africa
LAC
Asia
Ring
EuroOECD
W.Asia
CIS
More information at
www.worldbank.org/data/icp
Thank you!