Convergence indicators
methods, notes and classification
DATA_DESCR Purchasing power parities (PPPs) are indicators of price level differences across countries. PPPs tell us how many currency units a given quantity of goods and services costs in different countries. PPPs can thus be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency (the Purchasing Power Standard, PPS), eliminating the effect of price level differences across countries. The main use of PPPs is to convert national accounts aggregates, like the Gross Domestic Product (GDP) of different countries, into comparable volume aggregates. Applying nominal exchange rates in this process would overestimate the GDP of countries with high price levels relative to countries with low price levels. The use of PPPs ensures that the GDP of all countries is valued at a uniform price level and thus reflects only differences in the actual volume of the economy. PPPs are also applied in analyses of 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 another, or relative to a group of countries like the EU27. The production of PPPs is a multilateral exercise involving the National Statistical Institutes of the participating countries, Eurostat and the OECD. á Indicators in Eurostat's dissemination database The indicators published in the price domain on Eurostat's website are the following: Purchasing power parities (PPPs) scaled to the sum of expenditures of the EU Member States expressed in euro. This means that the PPP of one particular country indicates how many units of national currency one would need in that country in order to maintain the purchasing power of one euro in the EU Price level indices (PLIs) as defined above Nominal expenditure in national currency, as extracted from each country's national accounts Nominal expenditure as percentage of GDP Real expenditure, defined as nominal expenditure divided by the PPP Real expenditure per inhabitant Volume indices of real expenditure per inhabitant The price convergence indicator, defined as the coefficient of variation of the PLIs of household final consumption expenditure (HFCE). It provides an estimateáof the price convergence within a group of countries. For example, if the price convergence indicator for EU27 decreases over time, the national price levels in the Member States are converging. In addition, PPPs and real expenditures are available from the national accounts domain of the database. For further details, cf. 17.1.
CLASS_SYSTEM PPPs are produced in accordance with the final expenditure classification of the European Standard of Accounts (ESA95). PPPs are classified by type of final expenditure - actual individual consumption expenditure, actual collective consumption expenditure and capital expenditure - and, in the case of actual individual consumption expenditure, by purchaser - households, non-profit institutions serving households (NPISHs) and general government. The prices underlying the calculation of PPPs adhere to the definitions, concepts, classifications and accounting rules of ESA95. Basic headings and analytical categories For the purpose of the PPP calculation, the main expenditure aggregates comprising GDP are brokenádown into 224ábasic headings. The basic heading is the lowest level of aggregation, at which products are sampled and product prices collected. It is the lowest level for which countries should provide numerical expenditure weights. Below the basic heading level are the individual items of the product sample. For example, cheese is a basic heading and cheddar, camembert, feta, gorgonzola, gouda, etc. are individual products within it. PPPs are published at the level of 60 analytical categoriesáwhich comprise aggregates of basic headings and include some of the main expenditure aggregates like GDP, actual individual consumption, household final consumption, collective consumptionáand gross fixed capital formation.
STAT_CONC_DEF Purchasing power parities In their simplest form PPPs are price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. For example, if the price of a hamburger in France is 3.11 euros and in the United Kingdom 1.94 pounds, then the PPP for hamburgers between France and the United Kingdom is 3.11 euros to 1.94 pounds, or 1.60 euros to the pound. This means that for every pound spent on hamburgers in the United Kingdom, 1.60 euros would have to be spent in France to obtain the same quantity and quality - or, in other words, the same volume - of hamburgers. Therefore, to compare the volumes of hamburgers purchased in the two countries, either the expenditure on hamburgers in France can be converted to pounds by dividing it by 1.60, or the expenditure on hamburgers in the United Kingdom can be converted to euros by multiplying it by 1.60. PPPs can refer to a single product, a product group, or the economy as a whole. In moving up the hierarchy of aggregation, the PPPs refer to increasingly complex assortments of goods and services. Thus, if the PPP for GDP ("the economy as a whole") between France and the United Kingdom is 1.39 euros to the pound, it can be inferred that for every pound spent on the GDP in the United Kingdom, 1.39 euros would have to be spent in France to purchase the same volume of goods and services. Purchasing the "same volume of goods and services" does not mean that exactly identical baskets of goods and services will be purchased in both countries. The composition of the baskets will vary between countries and reflect differences in tastes and cultural backgrounds, but both baskets will, in principle, provide equivalent satisfaction or utility. Derived indicators PPPs are used to describe and analyse price level differences across countries. If PPPs are divided by the nominal exchange rate, a price level index (PLI) for each country and product group is obtained. At the level of GDP, PLIs express the general price level of a given country relative to another, or to a group of countries. In the example above, the PPP between France and the United Kingdom was 1.39. If, at the same time, the nominal exchange rate between the euro and the pound was 1.47 euros to the pound, the PLI of France would be 95 [(1.39 / 1.47) ╫ 100], while the PLI for the UK, the base country, would be 100, implying that the overall price level in France is 5% lower than in the UK. "Real expenditure" or "expenditure in PPS" refers to an expenditure aggregate, for instance GDP or actual individual consumption, that has been converted to a common, technical currency and a common price level using PPPs. This conversion results in a set of data that is comparable across countries, and expresses the relative volume underlying each country's expenditure. If the real expenditure on, for instance, GDP is divided by the number of inhabitants in each country, the resulting real expenditure per inhabitant can be used as an indicator of the relative standard of living of the inhabitants of each country. It should be noted that real expenditures of the components of GDP do not add up to real GDP, due to the calculation method applied to aggregate PPPs (see section 20.5). Since we are referring to the standard of living relative to another country, or group of countries, it is often preferable to express GDP per capita in PPS as volume indices per capita, fixing the value of one country or group of countries at 100. Thus, if the volume index of GDP per capita in one country is 110, while that of the EU27 is set at 100, the volume of GDP per capita in that country is 10 percent higher than in the EU27 as a whole.
STAT_UNIT PPPs are calculated for each of the participant countries, for the EU as a whole, and for the euro area. There is no regional breakdown.
STAT_POP The expenditure side of national accounts, as defined in ESA95, defines the statistical population (cf. 3.2).
REF_AREA Eurostat is in charge of the annual calculation and dissemination of PPPs for 37 European countries. These include the 27 EU Member States and the 3 candidate countries (Croatia, the Former Yugoslav Republic of Macedonia and Turkey), 3 EFTA Member States (Iceland, Norway and Switzerland) and 4 further countries (Albania, Bosnia-Herzegovina, Montenegro and Serbia). In Eurostat's dissemination database, PPPs for Japan and the United States are included for reference as well, although these are computed by the OECD.
BASE_PER Not applicable, because PPPs areáprimarily spatial indicators.ááááá
UNIT_MEASURE PPPs can be interpreted as the exchange rates of countries' national currencies against the PPS. They express the number of currency units per PPS. Real expenditures are expenditures in national currency converted to PPS using PPPs. They are thus denominated in PPS. PLIs and volume indices per capita are indices that, in Eurostat's database, uses either EU27 or EU15 as "base country" (EU27=100 or EU15=100, depending on the user's choice).
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