Luigi Biggeri 1, Rita De Carli 2 and Tiziana Laureti 3 1 Istat and University of Firenze, Italy; 2 Istat, Italy; 3 University of Tuscia, Italy Geneva, 8-9 May 2008 The interpretation of the PPPs: a method for measuring the factors that affect the comparisons and the integration with the CPI work at regional level Joint UNECE/ILO Meeting on Consumer Price Indices

2 Structure of the paper Joint UNECE/ILO Meeting on Consumer Price Indices Geneva, 8-9 May Introduction 2.Difficulties in interpreting PPPs: comparability and representativeness 3.A method for measuring the factors that affect the comparisons of consumer price levels 4. Preliminary results from one experiment 5.Concluding remarks

Joint UNECE/ILO Meeting on Consumer Price Indices Geneva, 8-9 May Introduction The aim of the paper suggest a simple method to evaluate the importance of the different factors factors consumer price levels Investigate the factors that can affects comparisons of consumer price levels between two areas Our proposal is theoretical in order to point out the methods and the detailed data which are necessary to interpret adequately the binary consumer spatial indices The measures could be helpful for deciding to what extent the products included in the list for the computation of spatial indices should be comparable and/or representative and characteristic of the household consumption for integrating CPI and PPP work, or to balance comparability and representativeness focusing on the comparisons across different areas or regions within a country

Joint UNECE/ILO Meeting on Consumer Price Indices 2. Difficulties in interpreting PPPs: comparability and representativeness (a) Geneva, 8-9 May 2008  Difficulties of the interpretation and criticisms to binary comparisons of PPPs conflicting choice is due to the conflicting choice between comparability and representativeness  To clarify the problems we need for: strict comparability  Clear definition of comparability, starting with the definition of strict comparability for identical products which then may be broadened precise definition  More precise definition of representativeness of products included in the comparison within the basic headings (BH)

Joint UNECE/ILO Meeting on Consumer Price Indices 2. Difficulties in interpreting PPPs: comparability and representativeness (b) Geneva, 8-9 May 2008 representative in terms of sample design share of households expenditures The products within a BH should be representative in terms of sample design and for consumer prices in terms of share of households expenditures Different degree of representativeness Different system of weights One or more products are characteristic in one of the two areas of vice-versa

Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of consumer price levels (a) Geneva, 8-9 May 2008  A framework for the comparison at BH level Only Binary comparisons for consumer price level all dataat productsare available The hypothesis is that all data on prices and weights at products level are available two different hypothetical situations  We present two different hypothetical situations

3. A method for measuring the factors that affect the comparisons of price levels (b) strictly comparable the same number of products with the same characteristics, therefore strictly comparable, are available both in the areas j and l Case1a (purely theoretical condition) Case1b (a more probable situation ) Joint UNECE/ILO Meeting on Consumer Price Indices Geneva, 8-9 May 2008

[2] Case1a equal the systems of weights are equal Case1b different the systems of weights are different, with a different degree of representativeness in the two areas 3. A method for measuring the factors that affect the comparisons of price levels (c) [3] [5bis] Joint UNECE/ILO Meeting on Consumer Price Indices Geneva, 8-9 May 2008 Average Prices’Parity

3. A method for measuring the factors that affect the comparisons of price levels (d) Joint UNECE/ILO Meeting on Consumer Price Indices  usual situation when making binary comparisons Overlapping area Outer areas: separate groups of products considered in the comparisons which can be found in area j but not in area l, and vice-versa Group of identical products (strictly comparable) with different systems of weights in the two areas (j and l) Geneva, 8-9 May 2008 two more different situations (pag. 6 of paper)

Joint UNECE/ILO Meeting on Consumer Price Indices Geneva, 8-9 May 2008 Considering the right hand side of expression [5bis] and taking into account all the products in the two areas, a new APP could be obtained by introducing a multiplicative factor as follows [10] PPE WE CE characteristicity effect ratio between the average prices of the characteristic products in the two areas The ratio between the average prices of the characteristic products in the two areas measures the effect due to the differences in their consumption baskets 3. A method for measuring the factors that affect the comparisons of price levels (e)

Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of consumer price levels (f) Geneva, 8-9 May 2008 multiplicative decomposition  Using the multiplicative decomposition when the value of the effects are greater than 1, it means that there is a positive influence and vice-versa when they are less than 1 four decompositions  It is possible to obtain four decompositions aggregate the APP above the BH level  It is possible to aggregate the APP above the BH level and also and also the three different factors have all the elementary information on prices and weights groups of products with different comparability and representativeness  To implement the decomposition we need to have all the elementary information on prices and weights for the groups of products with different comparability and representativeness

Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results from one experiment to measure the factors that affect APP at territorial level in Italy (a) Geneva, 8-9 May 2008  At the level of areas within a country the consumption baskets may be more similar (more strictly comparable products)  More comparable data at detailed elementary level are usually available for the areas within a country (collected for CPIs surveys) Istat started a research project  Istat started a research project in 2005 to carry out an experiment to calculate CPPs to compare the consumer price levels at regional level (De Carli, Room document) To test the possibility of using and integrating the statistical information currently supplied within the CPI surveys

Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results from one experiment to measure the factors that affect APP at territorial level in Italy (b) Geneva, 8-9 May expenditure divisions  The experiment has been conducted for 3 expenditure divisions  20 cities  The experiment refers to 20 cities all the necessary price data  Having all the necessary price data we attempted to calculate the APPs and to decompose them in the three components Food an beverages Clothing and fotwear Furniture CPIs surveys New ad hoc surveys do not have on expenditure share  Unfortunately we do not have on expenditure share at level of products, so the measure obtained are approximate

Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results and concluding remarks Geneva, 8-9 May 2008 weight effect and the characteristicity effect opay an important role  It is clear that the weight effect and the characteristicity effect opay an important role in the binary comparisons of consumer price levels between the different cities in Italy food products weight effect  The results regarding food products show that for some cities the weight effect is substantially less than 1 (min=0.700) haracteristicity and the characteristicity effect is more than 1 (max = 1.535)  For other cities the weight effect is substantially more than 1 (max = 1.309) characteristicity effect and the characteristicity effect less than 1 (min =0.586) very encouraging  Results obtained are very encouraging because they stress the importance to have this kind of measures to make correct decisions in the implementation of CPPs Further researches are necessary  Further researches are necessary