MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

2 Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

Week 7

International comparisons: the purchasing power parity (PPP) as a statistical device

Potential uses (and abuses) of PPPs Outline

• The concept of PPP

– Analogy: price indices between periods and between countries

– Decomposition of cross-country nominal differences: price and volume

• Types of PPPs and sources

• Uses of PPPs (international comparisons) – Price and volume

– Level and structure

• Applications, illustrations

3

The PPP: spatial price index

(Analogy with ordinary price indices)

^:

How to get value and price indices at a

common scale?

4

2009: nominal relative GDP/capita: price and volume components [HU-EU(27)]

Relative GDP/cap: nominal and real levels

and relative price levels

5

Volume and price (EU27=100)

Types of PPPs

• Scope

– Total economy (GDP-PPP)

– Certain components of GDP (e.g., consumption, investment)

• Common basket vs. (cross-country) price index – Basket (eg. Big Mac index, UBS-index) – Price index: PWT, OECD-Eurostat (O-E)

• Demand vs. supply side

– Demand-side (standardized) – Production side (experimental)

• Levels vs. structures – Levels: EKS-method

20 40 60 80 100 120 140

BG CZ DE EE IE EL ES FR LV LT HU AU PL PT RO SI SK 2000vol

2000price 2009vol 2009price

6 – Structure: GK-method

• Unofficial/popular vs. official – ”Popular” (Big Mac) – Semi-official (PWT)

– Official: OECD-Eurostat; World Bank A popular index

The Big Mac index An indigestible problem

Why China needs more expensive burgers Oct 14th 2010

7 Burgernomics : When the chips are down

The latest Big Mac index suggests the euro is still overvalued Jul 22nd 2010

8

For EU-countries: the relevant PPP is the PPS (Purchasing Power Standard)

• The purchasing power standard (PPS) is the name of the artificial currency unit in which the PPPs and real final expenditures for the EU 27 are expressed – namely, euros based on the EU 27.

• Euros based on the EU 27 are euros that have the same purchasing power over the whole of the EU 27.

• Their purchasing power is a weighted average of the purchasing power of the national currencies of EU Member States. As such they reflect the average price level in the EU 27. (OECD)

http://stats.oecd.org/glossary/detail.asp?ID=7184

• Essentially: the purchasing power of 1 PPS corresponds to 1 Euro for the EU27 (the average price level of the EU27 is the same, whether expressed in euro or in PPS)

Example: HU; 2008 (EU27=100):

• GDP relative price level (PPS/E)  65

• Final consumption expenditure  60,5



1. The relative price level (RPL) of consumption was lower than that of GDP.

2. The RPL of other items (i.e. investment) had to be higher.

9

Important implication

• The PPS (PPP) relates not only to GDP, but

• 283 individual expenditure items 

• Aggregated into PPPs for major expenditure groups 

• Serious mistake: to use PPP-GDP for comparing e.g. per capita expenditures on consumption (or investment)

• This mistake consistently made by Eurostat in its ”National Accounts database” and in the AMECO database

– http://epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/da tabase

 wrong!

– http://epp.eurostat.ec.europa.eu/portal/page/portal/purchasing_power_paritie s/data/database

 right

• PPPs generally relate to the expenditure side of GDP, but production side (sectoral) PPPs also available

Sources for PPPs

• EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/purchasing_power_parities/introducti on

• PWT General

http://pwt.econ.upenn.edu/

Recent data

http://pwt.econ.upenn.edu/php_site/pwt_index.php

• Production side PPPs and sectoral comparisons http://www.ggdc.net/

10

• OECD-Eurostat publication on PPP

Purchasing Power Parities and Real Expenditures – 2005 Benchmark Year OECD: Purchasing Power Parities - Frequently Asked Questions (FAQs)

http://www.oecd.org/document/5/0,3343,en_2649_34357_45854149_1_1_1_1,00.html

• Historical statistics:

http://www.ggdc.net/databases/hna.htm

Eurostat PPP database

• http://epp.eurostat.ec.europa.eu/portal/page/portal/purchasing_power_parities/intro duction

• Purchasing power parities (PPPs) are indicators of price level differences across countries.

• They indicate how many currency units a particular quantity of goods and services costs in different countries.

• PPPs can be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency (the Purchasing Power Standard, PPS), thus eliminating the effect of price level differences across countries.

• Uses

– Convert national accounts aggregates into comparable volume aggregates. In particular, PPPs can be used to compare the Gross Domestic Product (GDP) of different countries without the figures being distorted by differing price levels in those countries.

– Analyse relative price levels across countries. For this purpose, the PPPs are divided by the current nominal exchange rate to obtain a price level index (PLI) which expresses the price level of a given country relative to others.

• Available Data

• Data are available for 37 countries: the 27 EU Member States, three candidate countries, three member states of the European Free Trade Association (EFTA)

11 and four Western Balkan countries

Examples (OECD-Eurostat for 2005)

12

Uses of PPPs

• International comparison of – Volumes

– Prices (levels/structures)

• Abuses (e.g.)

– Calculating growth rates

– Applying expenditure side PPPs for sectoral comparisons on the production side of GDP

13

Comparison of volumes and prices

• Levels

– EKS-PPP¹

• Structures – GK-PPP²

For detailis: see Technical annex

The ”Gerschenkron effect” (relates to GK- PPP-t) – to avoid this problem, Eurostat- OECD applies the EKS-method for volume

comparisons

• The Gerschenkron effect applies to aggregation methods that use either a reference price structure or a reference volume structure to compare countries.

• For methods employing a reference price structure, a country’s share of total GDP (that is the total for the group of countries being compared) will rise as the reference price structure becomes less characteristic of its own price structure

•

For methods employing a reference volume structure, a country’s share of total GDP will fall as the reference volume structure becomes less characteristic of its own volume structure

1 Éltető-Köves-Szultc (non-additive)

2 Geary-Khamis (additive, but different problem 

14

• The Gerschenkron effect arises because of the negative correlation between prices and volumes.

• In other words, expenditure patterns change in response to changes in relative prices because consumers switch their expenditure towards relatively cheap products.

• The EKS method does not use either a reference price structure or a reference volume structure when estimating real expenditures.

Relative prices

• RPLI (Relative price level index) – external (EKS-PPP) e.g:

– PPPgdp/E; PPPcon/E; PPPinv/E etc. (EU27=100) – or: [(PPPgdp/E)^HU]/[(PPPgdp/E)^CZ], or

– [(PPPcon/E)^HU]/[(PPPcon/E)^CZ]

• Relative structure of prices (internal relative prices) – (in principle GK-PPP) e.g.:

EU I

HU I EU C

HU C

P P P

P 

or

For details: Technical annex

Second-best applications: PPP may be applied for income-comparisons

• Volume comparison of – GNI, GNDI etc.

– Labour income (alternative PPPs….) – Capital income (which PPP?)

• Real ratios, e.g.

EU GDP

EU C HU GDP HU C

P P P

P 

15 – Investment ratio,

– Household consumption/income

Problematic and erroneous applications of PPPs

• In the default mode: PPPs serve cross-section comparisons

• Certain applications for comparison in time are – Acceptable

– Unacceptable

• For comparisons in time: constant PPPs should be applied

Example: an inappropriate and an acceptable use of PPPs

A. Calculating growth rates: forbidden

B. Calculating changes in relative real levels: acceptable

16

OECD: GDP per capita at current and constant PPP (OECD average =100) http://stats.oecd.org/Index.aspx?DataSetCo

de=PPPGDP

Indicator

Comparative Price Levels Per capita volume indices

Current PPPs Constant 2005 PPPs

Time 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009

Country

Austria 108 115 118 115 115 114 117 117 114 115 118 117

Belgium 111 117 121 118 108 108 108 110 108 109 109 110

Czech Republic 62 66 76 70 71 74 76 77 72 74 75 75

Denmark 140 146 149 146 114 114 116 114 113 112 111 109

Estonia 65 73 76 71 61 64 64 60 61 64 61 54

Finland 119 124 127 124 105 109 111 107 105 108 109 104

France 113 118 123 120 100 101 101 102 100 99 99 100

Germany 105 110 112 110 107 108 109 110 107 108 110 109

Greece 88 95 97 97 85 85 88 88 84 86 87 88

Hungary 61 69 71 62 58 58 61 61 58 57 58 57

Iceland 153 170 127 102 114 112 115 111 118 119 118 115

Ireland 124 127 131 123 134 137 125 120 131 133 126 121

Italy 105 108 109 106 96 96 98 98 94 93 92 90

Netherlands 109 113 117 116 121 123 126 123 120 122 124 123

Poland 60 64 73 59 48 51 53 57 48 51 53 57

Portugal 83 87 90 86 73 73 73 76 71 71 71 72

Slovak Republic 56 64 71 70 58 63 68 69 58 63 66 66

Slovenia 76 83 87 86 81 82 86 83 82 85 89 84

Spain 92 96 99 97 96 97 98 98 93 92 92 92

Sweden 123 127 126 115 113 116 116 112 112 112 111 108

Switzerland 132 129 135 138 124 129 134 136 121 122 123 124

United Kingdom 115 125 111 98 111 108 108 106 111 111 110 108

United States 100 97 94 98 142 140 138 138 143 141 140 141

Euro area 104 109 112 109 101 101 103 103 100 100 100 100

OECD - Total 100 100 100 100 100 100 100 100 100 100 100 100

data extracted on 14 Jan 2011 19:49 UTC (GMT) from OECD.Stat

17

Example: the use of inappropriate PPPs

Per capita nominal, quasi-real and real level of expenditures on goods (left pane) ands services (right pane) in the CEE-NMS in 2008 (EU-15=100)

0 20 40 60 80 100 120

BU CZ EE LV LT HU PL RO SI SK

Goods/cap (nom) Goods/cap (quasi_vol) Goods/cap (vol)

0 10 20 30 40 50 60 70 80 90

BU CZ EE LV LT HU PL RO SI SK

Services/cap (nom) Services/cap (quasi_vol) Services/cap (vol)

– Sound comparison ”vol” (each item at its own PPP) – Not expressly wrong ”nom” (at current exchange rate)

– Expressly wrong ”quasi vol”: each item at the PPP of GDP

18

Sound application: the use of production- side PPPs (2005) Gross value added per

hour worked (double deflated)

0,00 0,10 0,20 0,30 0,40 0,50 0,60 0,70

TOT MARKT ELECOM GOODS MexElec OtherG

HU CZ PL SK

ELECTRICAL MACHINERY, POST AND COMMUNICATION SERVICES ELECOM TOTAL MANUFACTURING, EXCLUDING ELECTRICAL MexElec

Source: Appendix tables to Robert Inklaar and Marcel P. Timmer (2008), GGDC Productivity Level Database: International Comparisons Of Output, Inputs And Productivity At The Industry Level, GGDC Research Memorandum GD-104, Groningen: University of Groningen

19

Sound application: the use of production- side PPPs (2005) (cont.) Gross value added

per hour worked (double deflated)

Summing up

0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6

HU CZ PL SK

TOT MARKT ELECOM GOODS MexElec OtherG MSERV DISTR FINBU PERS NONMAR

20

Applications, illustrations

• International comparisons

– Relative real per capita GDP vs. relative price level (RPL) of GDP

– Per capita GDP and productivity (GDP/employed persons; GDP/hour worked) – Illustrations: external and internal relative prices

The ”Penn-effect” ³ in Europe

Per capita GDP and relative price levels 2008 (EU27=100)

3 Samuelson (1994). A possible explanation: Balassa–Samuelson (BS) effect UK

SE FI

SK SI

RO

PT

PL

AU NL

MT LT HU

LV

CY IT

FR

EL ES

IE

EE

DE DK

CZ

BU

y = 0,8245x + 15,602 BE R² = 0,8205

0 20 40 60 80 100 120 140 160

0 20 40 60 80 100 120 140

2009_price

GDP/cap

21

Relative GDP/cap (V_GDP) vs. RPL of GDP (P_GDP) cross section and time – 26

EU-countries, 1999–2008 (EU15=100)

20 40 60 80 100 120 140

20 40 60 80 100 120 140

V_GDP

P_GDP

P_GDP vs. V_GDP

22

Relative productivity (2 indicators) and GDP/cap, 2008

2008; EU15=100

GDP H GDP EMP GDP

H EMP EMP POP POP

BE 118 0,97 115 0,91 104

BU 35 1,02 35 1,10 39

CZ 54 1,21 66 1,11 73

DK 97 0,95 93 1,18 109

DE 110 0,88 97 1,07 104

EE 48 1,22 58 1,05 61

IE 104 1,14 117 1,03 121

EL 69 1,31 90 0,93 84

ES 93 1,02 94 0,98 93

FR 115 0,96 111 0,88 97

IT 89 1,12 100 0,92 92

CY 70 1,14 80 1,09 87

LV 38 1,24 47 1,09 52

LT 48 1,18 57 0,99 56

HU 53 1,23 65 0,90 59

MT 69 1,17 80 0,87 70

NL 123 0,85 104 1,16 121

AU 101 1,03 104 1,08 112

PL 44 1,28 57 0,90 51

PT 56 1,19 67 1,06 71

RO 39 1,16 46 0,95 43

SI 74 1,04 77 1,07 83

SK 66 1,09 72 0,91 65

FI 97 1,05 102 1,04 106

SE 102 1,01 102 1,08 111

UK 98 1,02 100 1,05 105

* = * =

Souce: Eurostat, own calculations

23

Relative productivity and GDP/cap in 2008 (EU15=100)

External relative prices: goods vs. services (EU15=100)

SK

SI

RO

PT

PL

MT

HU

LT

LV

CY

EE

CZ

BUBU

CZ EE

EL CY

LV LT

HU

MT

PL

PT

RO

SI

SK

30 40 50 60 70 80 90

30 40 50 60 70 80 90

2008_GDP/emp 2008_GDP/h GDP/emp, ill. GDP/h

GDP/cap

24

Internal relative prices: P_service /P_goods compared to GDP/cap (EU15=100)

R

²

= 0,8849

20 40 60 80 100 120 140

20 40 60 80 100 120 140

GDP/fő_PPS

P-szolg/P-áruk

HU CZ

25

Pgdp, Pserv, Pgood vs. GDP/cap – EU- NMS

Technical annex

Purchasing power parities, external and internal relative prices

Purchasing power parities (PPPs) are price ratios of specific items (e.g., goods and services) between a particular (“home”) country and a “numeraire” country (or region).

The PPP for GDP may be obtained as a weighted average of individual PPPs for the major components of GDP.

PPPi = Pi/Pi*,

10 20 30 40 50 60 70

20 24 28 32 36 40

bg

20 30 40 50 60 70 80 90

56 60 64 68 72 76

cz

30 40 50 60 70 80 90

35 40 45 50 55 60 65

ee

20 30 40 50 60 70 80

46 48 50 52 54 56 58 60

hu

20 30 40 50 60 70 80

32 36 40 44 48 52 56 60

lt

20 30 40 50 60 70 80 90

28 32 36 40 44 48 52

lv

30 40 50 60 70 80 90

40 42 44 46 48 50 52

pl

20 30 40 50 60 70 80

20 24 28 32 36 40 44

ro

55 60 65 70 75 80 85 90

68 70 72 74 76 78 80 82 84 si

20 30 40 50 60 70 80 90

40 44 48 52 56 60 64 68

V_GDP

P_GDP P_GOOD P_SERV

sk

26 PPPgdp = Pgdp/Pgdp* [= iPPPi , (i=1)],

where Pi and i are, respectively, the domestic price of, and weights belonging to, the i- th component of GDP, the sign (*) indicates the numeraire country (region). PPPgdp indicates the PPP for GDP, often referred to as the “general’ PPP of a country.⁴

External (or international) relative prices (also referred to as “price level indices” or

“comparative price levels”) are the ratios of PPPs to exchange rates. That is, RP(x)i = PPPi/E,

RP(x)gdp = PPPgdp/E,

where RP(x)i is the external relative price of the i-th component of GDP and E denotes the exchange rate (domestic currency per unit of foreign currency). RP(x)gdp is the general external relative price level of a country.

The internal relative price (between items i and j), in turn, can be expressed as RP(i)i,j = PPPi/PPPj=RP(x)i/RP(x)j,

where i represents a specific item (e.g., “services”) and j can either represent another specific item (e.g., “goods”) or the PPP for (external relative price of) the GDP.

4 The relationship in square brackets holds only for the so-called (Geary–Khamis) PPPs.

27