“Purchasing power parities” (PPPs) as calculated in the context of international economic comparisons make an important contribution to price statistics at an international level. PPPs are price ratios for comparable goods and services between different countries. Aggregated PPPs are calculated using an international basket of goods and serve as factors for converting countries’ amounts spent into a common currency unit at the same price level. The use of PPPs (instead of the official exchange rates) eliminates differences in the price levels between countries, with the result that a defined amount spent has the same purchasing power in all countries. In conjunction with their use for comparing the aggregates of the National Accounts (NA) of different countries, PPPs are also known as spatial deflators.
In the context of the European Comparison Programme (ECP), PPPs are calculated by Eurostat in cooperation with the OECD
and in close collaboration with the statistical institutions of 37 participating
countries: EU (27), United Kingdom, EFTA (3), candidate countries (5),
potential candidate country (1). Its main objective is to carry out
annual volume comparisons of the main aggregates of the National Accounts.
A fundamental pre-assumption of reliable comparison is the international
comparability of the goods and services under observation. The work
focuses on monitoring prices in private household consumption (approx.
The outcome of these comparisons are so-called volume indices or per-capita volume indices, in other words indices of the relative value of amounts spent by countries compared to another country (or group of countries). If the comparison is made at the level of gross domestic product (GDP), volume indices depict the relative size of a national economy, while per-capita volume indices reflect the relative position of a national economy in terms of its economic development. Comparative price level indices (PLIs) are calculated as the ratio of the PPP and the exchange rate (XR) and serve as an indicator of the differences between the overall price levels of the countries. The above indicators are published by Eurostat at the level of 61 analytical categories, which include the main NA aggregates.
The European Commission uses the results of PPP-based comparisons to calculate a couple of European indicators and to allocate support projects in conjunction with administration of the Structural Funds, and uses regional GDP per capita to PPP comparisons to calculate regional subsidies (Cohesion Fund). The data is used in politics and research for economic analyses and studies in conjunction with economic and social-welfare policy in an international context; by private companies for comparative analyses concerning production costs, prices and turnover; and in the banking sector for economic assessments of exchange rates. Finally PPPs and PLIs are used by international organisations and companies as equalising factors for wages and salaries in order to compensate purchasing power losses or gains experienced by employees working abroad (so-called correction coefficients).
The ECP itself is part of a global exercise, the International Comparison Program (ICP), which is coordinated by the World Bank in cooperation with other international organisations (e.g. UN/SD, IMF, OECD, Eurostat …). Status Global Round 2017: 176 participating countries worldwide.
Further information on the methodology of purchasing power parities can be found in the “EUROSTAT-OECD Methodological Manual on Purchasing Power Parities − 2012 edition” (PDF, 10 MB)
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