11/01/2005 - The OECD, within the framework of the Eurostat-OECD joint PPP Programme has calculated purchasing power parities (PPPs) for the benchmark year 2002 for all 30 OECD Member countries and 12 other countries. Results at the level of total GDP can be found in the attached table and graph.
Eurostat, who provided the data for the 25 EU member states and 6 other associated European countries, published its final results 2002 at 13 December 2004 in the series "Statistics in Focus" and on its website.
What are PPPs?
PPPs are currency conversion rates that enable international volume comparisons of GDP by taking into account the differences in price levels between countries. To do so, prices of a basket of comparable and representative goods and services are compared across countries. The basket included some 3 000 items and covered the entire range of final goods and services (consumption goods and services, government services, equipment goods and construction projects) which make up GDP.
The appropriate tool to compare GDP per capita between countries…
Often, income or GDP levels across countries are compared by converting national data into a common currency using exchange rates. However, exchange rates only partly reflect relative prices of goods that are domestically consumed and invested - many other factors such as interest rates and capital flows shape exchange rates, witness their frequent and large swings. This is different with PPPs that directly reflect relative prices of consumer and investment goods in different countries.
Consider for example per capita GDP for Switzerland relative to the OECD average: when based on exchange rates, income per person would appear to exceed those of United States. However, when PPPs are used, Switzerland per capita GDP turns out to be lower than that of the United States. This is because the price level is higher in Switzerland than in the United States. However, when the price level effect is removed, the volume of goods and services purchased in the United States is higher, on a per capita basis, than any other country included in the comparison except Luxembourg and Norway.
…in particular when it comes to comparing groups of high and low income countries…
Generally, the gap between high-income countries and low-income countries narrows when PPPs are used instead of exchange rates. For example, the per capita indices based on PPPs of Mexico, Greece, Hungary, Poland, Portugal, Turkey and Russian Federation are closer to those of United States than are their per capita indices based on exchange rates. Again, this is because the price levels in these countries are low compared to richer countries.
…but care must be taken not to over-interpret small differences between countries…
Small differences in per capita GDP between countries are not, in general, statistically or economically significant. Thus, the precision of the underlying data does not justify claims that, for example, real GDP per person in Sweden (index of 111 with OECD average=100), Australia (110), Finland (109), France (109) were significantly different from each other.
…and country groupings are preferable to precise ranking.
As the per capita index based on PPPs is not sufficiently accurate to establish a strict order of ranking, four country groups have been identified. Country indices are based on OECD 30 = 100, where average per capita GDP corresponds to USD 23 100:
The index for Ireland rose from 114 in 1999 to 129 in 2002 moving it into the group of high-income countries. Elsewhere the groupings remained generally unchanged.
A way of establishing the relative size of economies…
In this context, another use of PPPs is that of measuring the relative size of economies. The attached table shows each country's GDP as a percentage of total GDP of the 30 OECD countries. There is a marked difference in the appreciation of the size of economies, depending on whether exchange rates or PPPs are used to compare GDP data: the discrepancy is in particular present in the group of low income countries. For example, on an exchange rate basis, the Russian Federation corresponds to about 1.3 percent of total GDP in the OECD area. Corrected for differences in the price level, this number rises to 4 percent.
PPP-based GDP data provide a clearer picture of the relative importance of the ten largest economies covered by the comparison -- United States, Japan, Germany, United Kingdom, France, Italy, Russian Federation, Mexico, Spain and Canada. They also confirm that by 2002 the 15 EU countries as a group were virtually of the same economic size as the United States.
For more detailed information, see:
Data from 1999 to 2002 for real GDP per capita volume indices are available here.
More information on PPPs are also available free of charge at: www.oecd.org/std/ppp