1 PPPs for Industry Output: A New Dataset for International Comparisons Bart van Ark, Marcel Timmer and Gerard Ypma Groningen Growth and Development Centre Presentation prepared for Discussion session on Productivity Levels and PPPs, Bern, 18 October 2006 This work is partly funded by an NSF research project on “Improved Methods of Estimating Production and Income across Nations” and by the EU 6th Framework Programme on EU KLEMS “Industry Productivity in the EU”

2 Background  Increased attention for PPPs (theory, methodology and practical applications)  Largely based on expenditure PPP (concepts and databases (e.g., ICP and PWT)  Various applications deserve use of PPPs by industry (productivity, price convergence, Balassa-Samuelson hypothesis, historical work)  Use of production PPPs is hampered by a range of problems (small country coverage & bilateral nature, lack of readily available price surveys, double deflation, unit values, weak price measures for services, reconciliation problems with E-PPPs)

3 Double Motivation of Paper  Provide link between expenditure and output prices:  Based on system of supply-use tables  Develop criteria for use of expenditure prices or production prices for construction of industry PPPs  Provide new dataset of industry PPPs:  Based on a mix of production PPPs and adjusted (‘peeled’) expenditure PPPs  45 industries  26 countries, including 19 EU member states  New benchmark year 1997

4 Supply-Use Tables is Useful Framework to Reconcile Expenditure & Output Prices  Basic identity that equals use and supply of products:  intermediate consumption + final consumption + gross capital formation + exports = domestic output + imports  Products can be valued at three price concepts:  Basic price of the product received by the producer  Producer price = basic price + taxes on the product - subsidies on the product  Purchasers’ price = producer price + trade and transport margins in delivering the product to the purchaser

5 Link between expenditure and output prices (1)

6 Link between expenditure and output prices (2)  Result 1: equation (5)

7 Link between expenditure and output prices (3)  Assumption 2  Table 2

8 Link between expenditure and output prices (4)  Result 3:  A. Only for final goods, which are not internationally traded, the adjusted final expenditure price are equal to the basic output prices.  B.When the product is only used for intermediate consumption, the domestic output price cannot be estimated on the basis of a final expenditure price.  C.When a product is mainly exported, the adjusted final expenditure price will overestimate the basic output price.  D.In all other cases, the adjusted final expenditure price provides a biased estimator of the basic output price which size depends on the differences in purchasers’ prices and the ratio of import, export and intermediate consumption to total output.

9 Pro’s and con’s of production PPPs & adjusted expenditure PPPs  Production PPPs:  In theory preferable  Often based on unit value ratios (product mix problems)  Often biased towards relatively homogeneous products  Problems with services output prices  Adjusted Expenditure PPPs:  Based on separate price survey  Applicable to limited number of industries  Detailed information on margins and net taxes is often lacking  Import and export adjustments are very problematic  Adjustment for intermediate inputs as well.  With application of SUT-based criteria better choice, but remains largely empirical issue on industry by industry basis

Table 3 Assessment of production PPPs & adjusted expenditure PPPs for industry comparisons Note: ranking indicates 0 (not available), 1 (very poor), 2 ( poor), 3 (acceptable), 4 (useful) and 5 (very useful). Source: assessment based on expenditure PPPs for OECD from 1999 round and production PPPs for 1997 from Groningen Growth and Development Centre, ICOP-project, see section 4.

11 A New ICOP Dataset for Industry outputPPPs  Improvements over previous ICOP studies:  country and industry coverage is much bigger  uses consistent criteria for the selection of the PPP method  Above 221 industry (“basic heading”) level use of EKS multilateral weighting system  Weights are based on gross output or “matched output”  Below industry (“basic heading”) level use of best possible source on broad sector basis

Agricultural PPPs are based on off-farm prices from FAO database

With exception of East European Countries, U.S. has lowest prices in agriculture 4.89

Manufacturing PPPs for EU countries are now based on common database for manufacturing products (PRODCOM), matched through Germany with US

Manufacturing PPPs show considerable larger output and product coverage than before

Relative price spread in manufacturing is more than 2:1

Derivation of PPPs in Retail Trade is now consistent with commonly applied approach in national accounts

19 Table 4 Relative price levels for gross output (US = 1), broad sectors, 1997

20 Conclusions and Next Steps  An economy-wide application of industry PPPs is now within sight  Terms-of-Trade  Net taxes on products  Extension with input PPPs (intermediate inputs, capital, labour)  Extension to non-OECD countries  New applications:  EU KLEMS growth accounting and productivity  Balassa-Samuelson hypothesis  Price and productivity convergence  Potential for replication of mixed approach for historical comparisons