International Comparison Program
Frederic A. VogelGlobal Manager, ICPThe World Bank
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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
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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
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How convert national data into a common currency?
• Exchange rates
• or
• Purchasing Power Parities
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Statistical basis of PPPs
GDP or TVP A =
155
1i
N
j 1PAij QAij
GDP OR TVP B=
155
1i
N
j 1
PBij QBij
GDP or TVP Ausing B prices =
155
1i
N
j 1
PAij . (PBij / PAij ). QAij
Direct comparisons of country A with country B:
Exchange rates or PPPs ?
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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
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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…
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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)
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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
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Calculating the Big Mac Index
Compare the price of a Big Mac in four countries
Price in national currency
PPP toUS $
Exchange Rate
PPP scale factor
Philippines 68.02 23.5 55.30 2.4
China 10.20 3.5 7.50 2.1
Switzerland 6.17 2.1 1.26 0.6
US 2.90 1.0 1.00 1.0
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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
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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
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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 OfficeWorld Bank
ICP under auspices of the UN Statistical
Commission
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Historical Global ICP Participation
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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
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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 155Categories
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Individual Consumption by Households—Categories• Food & non-Alcoholic Beverages-29• Alcohol and Tobacco• Clothing & Footwear• Housing, water, electricity• Health• Education• Transport--etc
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Food Basic Headings
• Rice• Other Cereals• Pasta• Beef and Veal• Fish & Seafood• Fresh Milk
• Fresh Fruit• -• -• -• Sugar
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Purchasing Power Parities - The Steps
Start with the full GDPdivide into subgroups155 Basic Headings
Start with the full GDPdivide into subgroups155 Basic Headings
E.g. Food29 Basic Headings
E.g. Food29 Basic Headings
Define productsmatching “like with like”
collect prices
Define productsmatching “like with like”
collect prices
about 10 per Basic
Heading
about 10 per Basic
Heading1,000+
products
1,000+ products
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The Structured Product DefinitionDefine Products
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Data Collection
• Utilize CPI framework if possible• supplemented to obtain national
coverage– Product coverage– Annual estimates
National Annual Averages vs time to time change
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Number of items priced by regionCategory Africa Asia W. Asia LAC CIS Ring
Food and non-alcoholic beverages 356 223 353 147 198 281
Alcoholic beverages and tobacco 41 19 21 8 20 30
Clothing and footwear 128 78 162 136 104 132
Housing and utilities 21 17 12 18 22 35
Furnishing and household equipment 95 85 83 77 91 124
Health 144 112 69 51 75 162
Transportation 55 65 29 33 47 96
Communication 19 19 12 8 16 28
Recreation and Culture 49 70 59 54 79 96
Education 7 7 11 10 7 7
Restaurants 51 25 20 14 45 60
Misc goods and services 34 56 31 22 36 44
Total 1000 776 862 578 740 1095
.
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Purchasing Power Parities - The Steps
Start with the full GDPdivide into subgroups155 Basic Headings
Start with the full GDPdivide into subgroups155 Basic Headings
E.g. Food29 Basic Headings
E.g. Food29 Basic Headings
Define productsmatching “like with like”
collect prices
Define productsmatching “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
Calculate Basic Heading parities
Regional PPPs atBasic Heading level
Regional PPPs atBasic Heading level
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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
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Basic Heading Country A Country B Country C Rice Prices in Prices in Prices in Price ratios
Nat'l Nat'l Nat'lCurrency Currency Currency
Product B/A C/A C/BLong grain rice 10 40 100 4 10 2.5Medium grain rice 12 16 1.33Small grain rice 15 15 30 1 2 2imported 25 100 4
Geometric means/ PPPs 1.75 4.31 2.24
PPPs using direct and indirect measures 1.81 4.17 2.31
b/a = (c/a)/(c/b)
Countries have equal weights. Products have equal weights.
Basic Heading PPPs
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PPPs for Basic Headings
Two approaches
– EKS method• OECD-Eurostat countries and the CIS
Region
– CPD method• Used in all other Regions
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BC
CA
BA
PPPPPPPPP
• 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
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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:3
1
1
CB
CA
AB
BA
transitiveB
A
PPP
PPP
PPPPPPPPP
Elteto-Koves-Sulc (EKS) Method
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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
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• 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, ai is the country parameter, bj is the product parameter, and uij is the residual term. Results are transitive
ijjiij ubap lnlnlnln
CDP Method
njci ...,2,1;,...,2,1 ijp
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Combine Basic Headings
Countries have equal weight. EKS used to put all bilateral pairs into Multilateral comparison with transitive results. Do not have additivity
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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)
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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.
)( Gip
C
jC
j
ji
ji
jG
jiG
i
q
qx
PPP
pp
1
1
.
Aggregating PPPs
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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:
n
i
ji
Gi
n
i
ji
ji
jG
qp
qpPPP
1
1.)( Gip
Aggregating PPPs
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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
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Purchasing Power Parities - The Steps
Start with the full GDPdivide into subgroups155 Basic Headings
Start with the full GDPdivide into subgroups155 Basic Headings
E.g. Food33 Basic Headings
E.g. Food33 Basic Headings
Define productsmatching “like with like”
collect prices
Define productsmatching “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
Calculate Basic Heading parities Regional PPPs at
Basic Heading level
Regional PPPs atBasic Heading level
Combine Basic HeadingPPPs to subgroups,
then to GDP
Combine Basic HeadingPPPs to subgroups,
then to GDPFirst Regional, then Global GDP PPPsFirst Regional, then Global GDP PPPs
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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
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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
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Number of items priced by regionCategory Africa Asia W. Asia LAC CIS Ring
Food and non-alcoholic beverages 356 223 353 147 198 281
Alcoholic beverages and tobacco 41 19 21 8 20 30
Clothing and footwear 128 78 162 136 104 132
Housing and utilities 21 17 12 18 22 35
Furnishing and household equipment 95 85 83 77 91 124
Health 144 112 69 51 75 162
Transportation 55 65 29 33 47 96
Communication 19 19 12 8 16 28
Recreation and Culture 49 70 59 54 79 96
Education 7 7 11 10 7 7
Restaurants 51 25 20 14 45 60
Misc goods and services 34 56 31 22 36 44
Total 1000 776 862 578 740 1095
.
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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
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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
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Examples how PPPs are used
WHO and UNESCO use PPPs to measure health and education expenditures
Compare per capita expenditures for health, education, etc.
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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
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Sustainability—www.worldbank.org/data/ICP
• ICP Handbook and Operational Manuals
• Software and supporting documentation
• Numerous research papers
• Newsletter
Thank you
Questions????????????????/
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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
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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
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Table 3. CO² emissions per unit of GDP(tons per Dollar of GDP)Country Using PPPs Using Exchange Rates
Sweden 0.20 0.20
Zambia 0.21 0.53
France 0.23 0.27
Brazil 0.23 0.49
India 0.35 1.90
Mexico 0.39 0.60
United States 0.54 0.54
China 0.66 2.50
South Africa 0.73 2.28
Ukraine 1.09 6.92
Russia 1.17 4.65
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World Bank Atlas Method (Exchange rate based)
e = / + / + *t
P t
P t-2
P t
P t-2
S $
S $e t-2
1
3
P t
P t-1
P t
P t-1
S $
S $e t-1 e 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
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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+
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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
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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
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15) ln pij = ln + ln 2 xi2 + ln 3 xi3 + …ln c xic +
ln 2 y2j + ln 3 y3j + … ln n ynj + ij
Country Product Dummy (CPD)
Uses all data—each price receives same weightProvides estimates of Standard errors of PPPs
pij = 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 notPrice is for a representative product.
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Combine Basic Headings
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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
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PPPs for non-benchmark countries(ICPY) = b1(Atlas Y) + b2(HSER) + e
ICPY 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
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Statistical basis of the ICP
155
1i
GDP country A =
155
1i
N
j 1PAij QAij
GDP country B =
155
1i
N
j 1
PBij QBij
GDP country AB
using B prices =
155
1i
N
j 1
PAij . (PBij / PAij ). QAij
Direct comparisons of country A with country B:
Fundamental Principles
Products must beComparable
Using same pricingConcepts
Same time periodNeed to share data
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Statistical basis of the ICP
155
1i
GDP country A =
155
1i
N
j 1PAij QAij
GDP country B =
155
1i
N
j 1
PBij QBij
GDP country AB
using B prices =
155
1i
N
j 1
PAij . (PBij / PAij ). QAij
Direct comparisons of country A with country B:
Problem—PPPs Owner occupied Housing---Estimate quantities
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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
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Statistical basis of the ICP
155
1i
GDP country A =
155
1i
N
j 1PAij QAij
GDP country B =
155
1i
N
j 1
PBij QBij
GDP country AB
using B prices =
155
1i
N
j 1
PAij . (PBij / PAij ). QAij
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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Real Expenditure Shares Asia =100
010203040506070
PRC IND IRN INO THA PAK
GDP
AFCH
GFCF
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Relative Per Capita--Asia = 100
0
50
100
150
200
250
300
350
PRC IND IRN INO THA PAK
GDP
AFCH
GFCF
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Real Expenditure Shares Latin America =100
0102030405060
GDP
AFCH
GFCF
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Relative Per Capita-LAC = 100
0
50
100
150
200
GDP
AFCH
GFCF
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Consumption Expenditure Shares Africa =100
0
5
10
15
20
25
SA EGY NIG SUD MOR Tun
EXP
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Consumption Expenditure per capita relative
Africa =100
0
100
200
300
400
PerCap
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jkjk nn
i ij
ikjk p
pPPP
1
1
)3(
Purchasing Power Parity betweenTwo countries
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Statistical basis of PPPs
GDP country A =
155
1i
N
j 1PAij QAij
GDP country B =
155
1i
N
j 1
PBij QBij
GDP country Ausing B prices =
155
1i
N
j 1
PAij . (PBij / PAij ). QAij
Direct comparisons of country A with country B:
Exchange rates or PPPs ?
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The Steps
Region Consumption Specifications And number of Products priced
Housing, Gov’t comp, Equipment, Construction specs
Within region PPPs
Africa—48 Regional 1000 Global PPPs Africa Asia—23 Regional 778 Global PPPs
Asia LAC—10 Regional 678 Global PPPs LAC W. Asia—11 Regional 862 Global PPPs W. Asia CIS—10 Regional 740 Regional PPP CIS EU/OECD Regional Regional PPP Eurostat/OECD
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Region Consumption specifications
Housing, Gov’t comp, Equipment, Construction, specs
Within region PPPs
Ring countries
Africa—48 Regional Global PPP af 6 Asia—23 Regional Global PPP as 4 LAC—10 Regional Global PPP
lac 2
W. Asia—11
Regional Global PPP wa
2
CIS—10 Regional Regional PPP cis *(Russia) EU/OECD Regional Regional PPP
eu/oe 2
Ring Program
Global specs, composite of regions--1086
Global specs from above
Between region PPPs
Convert regional PPPs to Global Level
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Region-Country
Within region PPP
Ring Prices
Ring prices in regional currency
Between Region PPPs
Global PPPs
1-a PPPa = 1 PPP1 = 1 PPPa 1-b PPPb RPb RPb/PPPb PPPb 1-c PPPc PPPc 1-d PPPd PPPd 1-e PPPe RPe RPe/PPPe PPPe 1-f PPPf PPPf 2-g PPPg =1 PPP2 PPP2*PPPg 2-h PPPh PPP2*PPPh 2-i PPPi RPi RPi/PPPi PPP2*PPPi 2-j PPPj PPP2*PPPj 2-k PPPk RPk RPk/PPPk PPP2*PPPk 3-l PPPl =1 PPP3 PPP3*PPPl 3-m PPPm RPm RPm/PPPm PPP3*PPPm 3-n PPPn RPn RPn/PPPn PPP3*PPPn 3-o PPPo PPP3*PPPo
Methodology to Link Regional BH PPPs
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• 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.” PPPA/B ≠ PPPA/C * PPPC/B
• Comparison between any two countries should not depend upon choice of base country
A Complication
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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
Rice A B C
Long grain 10 40 100
Short grain 12 16
Parboiled 15 15 30
Imported 25 100
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nn
kjl kl
jljkjk PPP
PPPPPPEKS
1
,
2
Method to make direct parities = indirect parities
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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
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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.
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Inter country comparisons of Agricultural measures
• Total value of production
• Per capita
• TVP / GDP comparisons across countries.