PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. In their simplest form, PPPs are simply price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. PPPs are also calculated for product groups and for each of the various levels of aggregation up to and including GDP.
The calculation is undertaken in three stages. The first stage is at the product level, where price relatives are calculated for individual goods and services. A simple example would be a litre of Coca-Cola. If it costs 2.3 euros in France and 2.00$ in the United States then the PPP for Coca-Cola between France and the USA is 2.3/2.00, or 1.15. This means that for every dollar spent on a litre of Coca-Cola in the USA, 1.15 euros would have to be spent in France to obtain the same quantity and quality - or, in other words, the same volume - of Coca-Cola. The second stage is at the product group level, where the price relatives calculated for the products in the group are averaged to obtain unweighted PPPs for the group. Coca-cola is for example included in the product group “Softdrinks and Concentrates”. And the third stage is at the aggregation levels, where the PPPs for the product groups covered by the aggregation level are weighted and averaged to obtain weighted PPPs for the aggregation level up to GDP (in our example, aggregated levels are Non-alcoholic beverages, Food…). The weights used to aggregate the PPPs in the third stage are the expenditures on the product groups as established in the national accounts. You will find detailed information on the calculation in the “EUROSTAT-OECD Methodological manual on purchasing power parities (PPPs)”, Chapter 12.
The major use of PPPs is as a first step in making inter-country comparisons in real terms of gross domestic product (GDP) and its component expenditures. GDP is the aggregate used most frequently to represent the economic size of countries and, on a per capita basis, the economic well-being of their residents. Calculating PPPs is the first step in the process of converting the level of GDP and its major aggregates, expressed in national currencies, into a common currency to enable these comparisons to be made.There are also other uses and recommendations that can be find in details in the EUROSTAT-OECD Methodological manual on purchasing power parities (PPPs)” Chapter 1, box 1.5
Uses of PPPs
The basket of goods and services priced for the PPP exercise is a sample of all goods and services covered by GDP. The final product list covers around 3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects. The large number of products is to enable countries to identify goods and services which are representative of their domestic expenditures.
For OECD countries and accession countries
For European countries
You can find annual detailed PPP results for European Countries on the Eurostat’s website.
For non-European non-OECD countries
Since December 2016, the OECD has improved the quality of its annual PPP time series by (1) integrating survey results as soon as they become available without waiting for the completion of the whole survey cycle every three years, (2) relying on price deflators at a detailed level for annual extrapolations, and (3) increasing the frequency of some surveys (national accounts’ expenditure weights, compensation of employees, housing rents).
Note that the OECD methodology is now aligned with Eurostat’s methodology, as described in Chapter 12 of the Eurostat-OECD PPP Manual.
PPPs for a given year T are published in five steps:
In other words, the following results for GDP, AIC and IHC were published in December 2016:
In February 2017, first estimates for the year 2016 were published, second estimates will be published in June 2017.
Please note that in December 2016, PPP data from 1995 to 2012 were exceptionally revised for all European countries. Further information on this revision is available on the Eurostat website.
PPP data from 1970 to 2012 may be revised in December each year in order to incorporate revisions in National Accounts’ deflators. More information on historical time series is available in the following note.
You can find extensive information in the “EUROSTAT-OECD Methodological manual on purchasing power parities (PPPs)”. You can also find information on the Eurostat site and on the World Bank site.
The PPP for GDP covers both final consumption expenditure (household and government) and gross capital formation. The PPP for actual individual consumption covers all households consumption expenditure and that part of government final expenditure which covers services it supplies to individual households, for example housing, health, education, social protection etc ... (in other words, it does not include government final expenditure on those services it supplies to household collectively such as defence, police, environment protection ...). The PPP for Household Final Consumption (or Private Consumption) covers the expenditure by households on individual consumption of goods and services, including those sold at prices that are not economically significant. If you need more detailed definitions, you can refer to the glossary of the PPP Methodological Manual.
Monthly comparative price levels are defined as the ratios of PPPs for private final consumption expenditure to exchange rates. The monthly PPPs used to derive the table are OECD estimates. The table is to be read vertically. Each column shows the number of specified monetary units needed in each of the countries listed to buy the same representative basket of consumer goods and services. In each case the representative basket costs a hundred units in the country whose currency is specified. Let’s take an example. If you are a Canadian citizen and you want to know the price level in Canada when compared to other countries, you have to look at the column Canada, where the price level is set at 100 for the whole column. If you have 120 for Finland, it means that the price level in Finland is 20% higher than in Canada. It means that you would spend 120 dollars in Finland to buy the same basket of goods and services when you spend 100 in Canada.