1. International Comparison Program Frederic A. Vogel Global Manager, ICP The World Bank

2. The World Bank 2 Purpose or goal of this presentation Provide an understanding of what is a Purchasing Power Parity How they are estimated and their statistical and economic properties Provide an overview of the International Comparison Program Present uses of PPPs

3. The World Bank 3 The Problem—Comparing economic measures across countries Country Level Statistics are in National Currencies. Comparisons across countries require converting data into a common currency i.e. –Gross Domestic Product –Inter country comparisons of Agricultural output

4. The World Bank 4 How convert national data into a common currency? Exchange rates or Purchasing Power Parities

5. The World Bank 5 Statistical basis of PPPs GDP or TVP A = P Aij Q Aij GDP OR TVP B= P Bij Q Bij GDP or TVP A using B prices = P Aij. (P Bij / P Aij ). Q Aij Direct comparisons of country A with country B: Exchange rates or PPPs ?

6. The World Bank 6 Why not use exchange rates (X-rates)? X-rates will convert the GDPs to a common currency X-rates are easily understood being determined by the demand for & the supply of currencies X-rates are easily observed, cover all countries, readily available

7. The World Bank 7 Exchange rates differ from PPPs They do not measure differences in the relative price levels between countries Are fixed by policy in some countries Currency speculation and short-term capital movements cause exchange rates to fluctuate Price levels differ across components of GDP Fluctuations can make some countries appear “richer” or “poorer” almost overnight – e.g. Euro from $ 0.91 to $1.20 < 3 years Because…

8. The World Bank 8 What is a Purchasing Power Parity (PPP)? Form of Exchange Rate Based on comparison of prices between countries –International Price Index –Compares prices at a point in time across space vs. CPI comparing prices across time (Big Mac Example)

9. The World Bank 9 The Economist has popularized its international price comparisons based on the Big Mac Calculating PPPs: The Big Mac Example By comparing the local currency prices of Big Macs, the Economist measures relative price levels and compares these to the exchange rate

10. The World Bank 10 Calculating the Big Mac Index Compare the price of a Big Mac in four countries Price in national currency PPP to US $ Exchange Rate PPP scale factor Philippines 68.02 23.5 55.302.4 China 10.20 3.5 7.502.1 Switzerland 6.17 2.1 1.260.6 US 2.90 1.0 1.001.0

11. The World Bank 11 Limitations of the Big Mac Index It is based on only one product, and is not representative of the output of the full economy For example, Big Macs are sold mostly in urban areas and leave out traditional food such as rice The Big Mac Index is easy to calculate, but it leaves out a lot What is needed is an index that compares the prices of a large, representative basket of goods across many countries

12. The World Bank 12 Overview of the International Comparison Program The governance structure Explain the process and analytical methods to compute PPPs to Compare GDPs and similar economic variables between countries Procedure for 2005 benchmark year First regional comparisons which then are linked to provide PPPs at international $ for every country. Present uses of PPPs

13. The World Bank 13 ICP Governance Africa (48 countries) Asia (23 countries) CIS (10 countries) LAC (10 countries) West Asia (11 countries) Eurostat/ OECD (45 countries) ICP Executive Board Technical Advisory Group Global Office World Bank ICP under auspices of the UN Statistical Commission

14. The World Bank 14 Historical Global ICP Participation

15. The World Bank 15 Basic Data Required to compute PPPs for GDP --Expenditures A breakdown of final expenditure on National GDP into 155 categories using a common classification National annual prices for products chosen from a common basket of well-defined goods & services

16. The World Bank 16 The steps Start with GDP and Main aggregates –Individual Consumption by Households –Individual Consumption by NPISH –Individual Consumption by Government –Collective Consumption by Government –Capital Formation –Change in Inventories –Trade Balance Divide into 155 Categories

17. The World Bank 17 Individual Consumption by Households— Categories Food & non-Alcoholic Beverages-29 Alcohol and Tobacco Clothing & Footwear Housing, water, electricity Health Education Transport--etc

18. The World Bank 18 Food Basic Headings Rice Other Cereals Pasta Beef and Veal Fish & Seafood Fresh Milk Fresh Fruit - Sugar

19. The World Bank 19 Purchasing Power Parities - The Steps Start with the full GDP divide into subgroups 155 Basic Headings Start with the full GDP divide into subgroups 155 Basic Headings E.g. Food 29 Basic Headings E.g. Food 29 Basic Headings Define products matching “like with like” collect prices Define products matching “like with like” collect prices about 10 per Basic Heading about 10 per Basic Heading 1,000+ products 1,000+ products

20. The World Bank 20 The Structured Product Definition Define Products

21. The World Bank 21 Data Collection Utilize CPI framework if possible supplemented to obtain national coverage –Product coverage –Annual estimates National Annual Averages vs time to time change

22. The World Bank 22 Number of items priced by region CategoryAfricaAsiaW. AsiaLACCISRing Food and non-alcoholic beverages356223353147198281 Alcoholic beverages and tobacco41192182030 Clothing and footwear12878162136104132 Housing and utilities211712182235 Furnishing and household equipment9585837791124 Health144112695175162 Transportation556529334796 Communication19 1281628 Recreation and Culture497059547996 Education77111077 Restaurants512520144560 Misc goods and services345631223644 Total10007768625787401095.

23. The World Bank 23 Purchasing Power Parities - The Steps Start with the full GDP divide into subgroups 155 Basic Headings Start with the full GDP divide into subgroups 155 Basic Headings E.g. Food 29 Basic Headings E.g. Food 29 Basic Headings Define products matching “like with like” collect prices Define products matching “like with like” collect prices about 10 per Basic Heading about 10 per Basic Heading 1,000+ products 1,000+ products Calculate Basic Heading parities Regional PPPs at Basic Heading level Regional PPPs at Basic Heading level

24. The World Bank 24 Calculation of PPPs 1.First step-compute BH PPPs 2.Then combine / average Basic Heading PPPs to aggregates such as food, clothing, and on the consumption and the GDP 3.ICP Handbook, www.worldbank.org/data/ICP

25. The World Bank 25 Basic Heading PPPs

26. The World Bank 26 PPPs for Basic Headings Two approaches –EKS method OECD-Eurostat countries and the CIS Region –CPD method Used in all other Regions

27. The World Bank 27 Bilateral PPPs are calculated for each pair of countries in the region. They are the geometric averages of the price ratios of the individual products included in each Basic Heading. If not all the products were priced by all the countries: Bilateral PPPs obtained in this way will not be transitive. If they are not transitive, then for the three countries A,B and C. Elteto-Koves-Sulc (EKS) Method

28. The World Bank 28 Bilateral PPP made transitive by: –Taking the geometric average of the PPP calculated directly between A and B. –And all the PPPs for A and B that can be calculated indirectly. With 3 countries we have: Elteto-Koves-Sulc (EKS) Method

29. The World Bank 29 The CPD is a regression model which assumes: –- Individual product PPPs within a Basic Heading are constant between any given pair of countries –- Each country has overall price level that determines the absolute prices of products in the Basic Heading for that country CPD Method

30. The World Bank 30 When there are c countries and n products, the model can be written (in logarithmic terms) as: is the price in country i of product j, a i is the country parameter, b j is the product parameter, and u ij is the residual term. Results are transitive CDP Method

31. The World Bank 31 Combine Basic Headings Countries have equal weight. EKS used to put all bilateral pairs into Multilateral comparison with transitive results. Do not have additivity

32. The World Bank 32 Aggregation—Different methods available EKS—per example. Weights based on relative shares, thus countries treated equally regardless of economic size. –Components not additive to total G-K—Geary-Khamis. Uses quantity weights. Results are additive, however, can overstate real expenditures in poor countries. (Gershenkron effect)

33. The World Bank 33 Geary-Kharmis (GK) Method Based on the simple idea of estimating a unique set of international prices and these, like constant prices in a time series, are then used to revalue expenditures in each country. Aggregating PPPs

34. The World Bank 34 Geary-Kharmis (GK) Method There are i to n products and j to C countries; G refers to the group of countries. The group (international) price is a quantity-weighted average of the prices in the C countries with these prices converted to a common currency. The PPP is defined as : Aggregating PPPs

35. The World Bank 35 Geary-Kharmis (GK) Method - Problem Gerschenkron effect –Tends to overstate the volumes of countries whose relative prices are very different from the uniform set of prices. –Tends to resemble the price structure of the larger and richer countries in the group. –Volume measures obtained for poor countries appear artificially large. Aggregating PPPs

36. The World Bank 36 Purchasing Power Parities - The Steps Start with the full GDP divide into subgroups 155 Basic Headings Start with the full GDP divide into subgroups 155 Basic Headings E.g. Food 33 Basic Headings E.g. Food 33 Basic Headings Define products matching “like with like” collect prices Define products matching “like with like” collect prices about 10 per Basic Heading about 10 per Basic Heading 1,000+ products 1,000+ products Calculate Basic Heading parities Regional PPPs at Basic Heading level Regional PPPs at Basic Heading level Combine Basic Heading PPPs to subgroups, then to GDP Combine Basic Heading PPPs to subgroups, then to GDP First Regional, then Global GDP PPPs

37. The World Bank 37 Linking regions for Global Comparison The previous steps done independently by each of 6 regions Selected countries from each region collect prices using a product list reflecting the world as a whole

38. The World Bank 38 Ring to link regions Combine regional lists to create new set of global specifications –Updated regional SPDs to global set –Supporting software Develop linking methodology—see ICP Handbook www.worldbank.org/data/icp

39. The World Bank 39 Number of items priced by region CategoryAfricaAsiaW. AsiaLACCISRing Food and non-alcoholic beverages356223353147198281 Alcoholic beverages and tobacco41192182030 Clothing and footwear12878162136104132 Housing and utilities211712182235 Furnishing and household equipment9585837791124 Health144112695175162 Transportation556529334796 Communication19 1281628 Recreation and Culture497059547996 Education77111077 Restaurants512520144560 Misc goods and services345631223644 Total10007768625787401095.

40. The World Bank 40 Results Published by Three Regions LAC—Full GDP—10 countries Asia—Full GDP—23 countries Africa—Consumption—48 countries Remaining to follow Oct/Nov. for regional data. Global results--December

41. The World Bank 41 Examples how PPPs are used World Bank uses PPPs to establish international poverty lines IMF measures size of economy and aggregate growth rates in PPP terms EU allocates Structural Funds to member states System of National Accounts calls for real comparisons between countries to be done using PPPs

42. The World Bank 42 Examples how PPPs are used WHO and UNESCO use PPPs to measure health and education expenditures Compare per capita expenditures for health, education, etc.

43. The World Bank 43 Other Applications of PPPs PPPs differ from sector to sector allowing price levels for components of GDP to be compared across countries Use comparative ratios of investment to GDP to evaluate economic growth Evaluate living standards using PPP per capita expenditures

44. The World Bank 44 Sustainability—www.worldbank.org/data/ICP ICP Handbook and Operational Manuals Software and supporting documentation Numerous research papers Newsletter

45. Thank you Questions????????????????/

46. The World Bank 46 Fundamental Principles of the ICP Comparability of results between countries Common understanding of data sharing and confidentiality No other international statistical program requires as much cooperation between international, regional and countries

47. The World Bank 47 The ICP: New Benchmark Estimates The International Comparison Program, now underway, is a global initiative to produce new PPPs Includes over 100 countries plus adding in 40+ Eurostat/OECD — 1000+ items priced New methods of data collection and estimation will improve quality New PPPs will allow recalibration of estimates of poverty and sizes of economies

48. The World Bank 48 Table 3. CO² emissions per unit of GDP (tons per Dollar of GDP) CountryUsing PPPsUsing Exchange Rates Sweden0.20 Zambia0.210.53 France0.230.27 Brazil0.230.49 India0.351.90 Mexico0.390.60 United States0.54 China0.662.50 South Africa0.732.28 Ukraine1.096.92 Russia1.174.65

49. The World Bank 49 World Bank Atlas Method (Exchange rate based) e = / + / + *t*t P t P t-2 P t P t-2 S $ e t-2 1313 P t P t-1 P t P t-1 S $ e t-1 e te t P t = GDP deflator year t e t = Annual average x-rate P t = IMF Special Drawing Rights (SDR) deflator in US $ S $ Three year moving of annual average exchange rates adjusted by The ratio of the GDP and IMF SDR deflators

50. The World Bank 50 Number of products to price in each Basic Heading Depends on homogeniety of products with the Basic Heading Fish and sea food vs. Milk and eggs Time and cost also factors Need 5 minimum up to 20+

51. The World Bank 51 Why We Need New Estimates of PPPs Existing PPPs are based on price surveys carried out during the 1993-96 period and updated by comparing domestic price levels They include estimates for countries that did not participate. For example, China, India, and many African countries were not included in the previous surveys Size and structure of economies have changed

52. The World Bank 52 Multilateral Comparison The parity between any two countries does not depend upon which country is used as the base for the comparisons Final PPPs are based on a composite of direct and indirect parities Prices from one country affect PPPs for all other countries

53. The World Bank 53 15) ln p ij = ln  + ln  2 x i2 + ln  3 x i3 + …ln  c x ic + ln  2 y 2j + ln  3 y 3j + … ln  n y nj +  ij Country Product Dummy (CPD) Uses all data—each price receives same weight Provides estimates of Standard errors of PPPs p ij =   j  i ij i = 1, 2, … n : j = 1, 2, … c (12)  1 =  1 = 1 Model can be extended to use weighting based on Expenditure weights for example, or whether or not Price is for a representative product.

54. The World Bank 54 Combine Basic Headings

55. The World Bank 55 Different methods can be used EKS—Elteto, Koves, and Szulc –Provides results that are base country invarient and transitive CPD—Country Product Dummy –Regression method-results are invarient and transitive –Provides measures of variability –Used for this round Both provide same results if there are no missing prices

56. The World Bank 56 PPPs for non-benchmark countries(ICP Y ) = b 1 (Atlas Y ) + b 2 (HSER) + e ICP Y PPP adjusted GNI per capita Atlas Y Atlas GNI per capita HSER Gross High School enrollment e Residual term PPPs for non-benchmark countries in ICP

57. The World Bank 57 Statistical basis of the ICP GDP country A = P Aij Q Aij GDP country B = P Bij Q Bij GDP country A B using B prices = P Aij. (P Bij / P Aij ). Q Aij Direct comparisons of country A with country B: Fundamental Principles Products must be Comparable Using same pricing Concepts Same time period Need to share data

58. The World Bank 58 Statistical basis of the ICP GDP country A = P Aij Q Aij GDP country B = P Bij Q Bij GDP country A B using B prices = P Aij. (P Bij / P Aij ). Q Aij Direct comparisons of country A with country B: Problem—PPPs Owner occupied Housing---Estimate quantities

59. The World Bank 59 What are PPPs? Purchasing Power Parities based on relative price levels between countries A method to convert national GDPs to a common currency for comparison purposes using national prices instead of exchange rates

60. The World Bank 60 Statistical basis of the ICP GDP country A = P Aij Q Aij GDP country B = P Bij Q Bij GDP country A B using B prices = P Aij. (P Bij / P Aij ). Q Aij Direct comparisons of country A with country B: Problem—PPPs Owner occupied Housing---Estimate quantities Quantity sq.feet, Number rooms Quality, water, Electricity, etc Traditional vs. Modern

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67. The World Bank 67 Purchasing Power Parity between Two countries

68. The World Bank 68 Statistical basis of PPPs GDP country A = P Aij Q Aij GDP country B = P Bij Q Bij GDP country A using B prices = P Aij. (P Bij / P Aij ). Q Aij Direct comparisons of country A with country B: Exchange rates or PPPs ?

69. The World Bank 69 The Steps

70. The World Bank 70 Convert regional PPPs to Global Level

71. The World Bank 71 Methodology to Link Regional BH PPPs

72. The World Bank 72 Gaps - not all types of rice are sold in all countries A/B rice PPP may be based on a different set of rice products from the A/C and B/C rice PPPs Set of PPPs will not be consistent with each other. They are not “transitive.” PPP A/B ≠ PPP A/C * PPP C/B Comparison between any two countries should not depend upon choice of base country A Complication

73. The World Bank 73 Calculate Basic Heading Parities Parities are calculated from average prices in national currency for products in each of 155 basic headings of the GDP Prices by Country RiceABC Long grain1040100 Short grain1216 Parboiled15 30 Imported25100

74. The World Bank 74 Method to make direct parities = indirect parities

75. The World Bank 75 Moving from Bilateral to Multilateral The parity between A and B can be made transitive by using the indirect comparisons between other countries: Comparison of country A and C (C/A) Comparison of country B and C (C/B) The ratio of these two (C/B)/(C/A)=B/A which is an indirect estimate of the parity between A and B

76. The World Bank 76 Gross Domestic Product Represents size of a country’s economy and structure Per capita measures provide evaluation of economic well-being Compare sizes and components such as investments, between countries to evaluate growth and development Compare income--$1/per day for poverty comparisons.

77. The World Bank 77 Inter country comparisons of Agricultural measures Total value of production Per capita TVP / GDP comparisons across countries.