International Comparison Program Frederic A Vogel Global Manager

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

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 The World Bank 2

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 The World Bank 3

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

Statistical basis of PPPs GDP or TVP A = GDP OR TVP B= PAij QAij PBij QBij Exchange rates or PPPs ? Direct comparisons of country A with country B: GDP or TVP A using B prices The World Bank = PAij. (PBij / PAij ). QAij 5

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 The World Bank 6

Exchange rates differ from PPPs They do not measure differences in the relative price levels between countries Are fixed by policy in some countries The World Bank Because… Currency speculation and short-term capital movements cause exchange rates to fluctuate Fluctuations can make some countries appear “richer” or “poorer” almost overnight – e. g. Euro from $ 0. 91 to $1. 20 < 3 years Price levels differ across components of GDP 7

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) The World Bank 8

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

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. 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. 00 1. 0 The World Bank 10

Limitations of the Big Mac Index The Big Mac Index is easy to calculate, but it leaves out a lot • 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 What is needed is an index that compares the prices of a large, representative basket of goods across many countries The World Bank 11

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 The World Bank 12

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

Historical Global ICP Participation The World Bank 14

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

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 The World Bank 16

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

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

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

The Structured Product Definition Define Products The World Bank 20

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

Number of items priced by region Category Food and non-alcoholic beverages Africa Asia W. Asia LAC CIS Ring 356 223 353 147 198 281 41 19 21 8 20 30 128 78 162 136 104 132 Housing and utilities 21 17 12 18 22 35 Furnishing and household equipment 95 85 83 77 91 124 144 112 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 7 7 11 10 7 7 Restaurants 51 25 20 14 45 60 Misc goods and services 34 56 31 22 36 44 1000 776 862 578 740 1095 Alcoholic beverages and tobacco Clothing and footwear Health Education Total . The World Bank 22

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

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 The World Bank 24

Basic Heading PPPs The World Bank 25

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

Elteto-Koves-Sulc (EKS) Method • 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. The World Bank 27

Elteto-Koves-Sulc (EKS) Method 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: The World Bank 28

CPD Method 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 The World Bank 29

CDP Method • 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 The World Bank 30

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

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) The World Bank 32

Aggregating PPPs 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. The World Bank 33

Aggregating PPPs 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: The World Bank 34

Aggregating PPPs 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. The World Bank 35

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

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 The World Bank 37

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 The World Bank 38

Number of items priced by region Category Food and non-alcoholic beverages Africa Asia W. Asia LAC CIS Ring 356 223 353 147 198 281 41 19 21 8 20 30 128 78 162 136 104 132 Housing and utilities 21 17 12 18 22 35 Furnishing and household equipment 95 85 83 77 91 124 144 112 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 7 7 11 10 7 7 Restaurants 51 25 20 14 45 60 Misc goods and services 34 56 31 22 36 44 1000 776 862 578 740 1095 Alcoholic beverages and tobacco Clothing and footwear Health Education Total . The World Bank 39

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 The World Bank 40

Examples how PPPs are used System of National Accounts calls for real comparisons between countries to be done using PPPs 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 The World Bank 41

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

Other Applications of 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 The World Bank 43

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

Thank you • Questions? ? ? ? /

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 The World Bank 46

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 The World Bank 47

Table 3. CO² emissions per unit of GDP (tons per Country Dollar of GDP)Using PPPs Using Exchange Rates Sweden 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 China 0. 66 2. 50 South Africa 0. 73 2. 28 Ukraine 1. 09 6. 92 Russia 1. 17 4. 65 The World Bank 48

World Bank Atlas Method (Exchange rate based) Three year moving of annual average exchange rates adjusted by The ratio of the GDP and IMF SDR deflators * e = t 1 3 S $ P t P t P t-2 P t-1 e t-2 / + e t-1 e t S $ e t = Annual average x-rate P t = GDP deflator year t S $ P t = IMF Special Drawing Rights (SDR) deflator in US $ The World Bank 49

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+ The World Bank 50

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 The World Bank 51

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 The World Bank 52

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

Combine Basic Headings The World Bank 54

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 The World Bank 55

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

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

Statistical basis of the ICP Problem—PPPs Owner occupied Housing---Estimate quantities GDP country A = GDP country B = PAij QAij PBij QBij Direct comparisons of country A with country B: GDP country AB using B prices The World Bank = PAij. (PBij / PAij ). QAij 58

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 The World Bank 59

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

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Purchasing Power Parity between Two countries The World Bank 67

Statistical basis of PPPs GDP country A = GDP country B = PAij QAij PBij QBij Exchange rates or PPPs ? Direct comparisons of country A with country B: GDP country A = using B prices The World Bank PAij. (PBij / PAij ). QAij 68

The Steps The World Bank 69

Convert regional PPPs to Global Level The World Bank 70

Methodology to Link Regional BH PPPs The World Bank 71

A Complication • 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 The World Bank 72

Calculate Basic Heading Parities are calculated from average prices in national currency for products in each of 155 basic headings of the GDP The World Bank Prices by Country Rice A B Long grain 10 40 Short grain 12 16 Parboiled 15 15 Imported 25 C 100 30 100 73

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

Moving from Bilateral to Multilateral The parity between A and B can be made transitive by using the indirect comparisons between other countries: • • • The World Bank 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 75

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. The World Bank 76

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