Purchasing power parity survey, commodity and service prices, annual
Annual data
The reference period is the actual calendar year. Results are available the 15th of July after the reference year.
Covers the whole country.
240 - Division for Price Statistics
The Statistics Act of June 16, 1989 number 54, §§2-2 and 2-3
Regulation (EC) No 1445/2007 of the European Parliament and of the Council of 11.December 2007.
The European Price Comparison program is international statistics cooperation where the National Statistics offices of participating countries are responsible for data collection in their respective countries. The Statistical Office of the European Communities (EUROSTAT) is responsible for calculating the results. There is an interactive process between the participating countries and the EUROSTAT in the validation of input data. Participating countries gives the final validation before EUROSTAT publishes the results.
The purpose of the European Price Comparison Programme is to produce indicators that show relative price levels differences across participating countries. A central concept used here is the Purchasing Power Parity (PPP), please refer to 4.1.
The work is coordinated by the EUROSTAT and the Organisation for Economic Cooperation and Development (OECD). Until 1992 Norway was one of the countries that completed the survey under the coordination of OECD. However from 1993 Norway participated in the survey under the coordination of EUROSTAT. Since 2004 EUROSTAT has been coordinating the work in the 27 European Union (EU) Member States together with the 3 European Free Trade Association (EFTA) countries Iceland, Norway and Switzerland, the EU candidate countries and Albania, Bosnia-Herzegovina, Montenegro and Serbia. OECD coordinates similar exercise in the non-European OECD member states.
The first published results which included data from Norway were in 1980, thereafter 1985, 1990 and 1993. After these dates the figures could be viewed within EUROSTATs publishing frame. Every third year, OECD prepares indicators for all OECD countries, and extrapolates the years in between.
The results from EUROSTAT and OECD are included in the International Comparison Programme (ICP), which are carried out in behalf of the United Nations and the World Bank.
The results of the survey are used to convert National accounts aggregates such that volume is taken into consideration in cross country comparisons. The survey allows for better comparison. For example in comparing the value of a product (which is composed of price and volume component), use of exchange rate could lead to overvaluation for countries with high price levels while the opposite effect could happen for countries with low price levels.
An important example in use of such statistic is the assistance allocated to EU’s poorer regions through the structural funds. The allocation of the fund is made on the basis of PPP converted regional GDP per capita. The results from the European Price comparison is the basis of the price level adjustment and thus the European Commission contributes substantially to the financing of the program.
Generally the most significant result from the European Price Comparison survey is the use of PPP as a currency converter across countries and use of area exchange rate instead of the foreign exchange rate. This is possible if for example one wants to compute how much a given amount in country A is worth in country B, under the assumption that the same purchasing power is maintained. The use of such material is seen in business activities, government administration, research and the media. PPP is used not just in adjusting price levels but can serve as basis for analysis of the relative price levels in different countries.
The price collection for the PPP covers a broad sample of consumption and investments goods, market and non-market services as defined in ESA95, which is the expenditure side of the National Accounts.
Prices of goods and services of private consumption at the same time as investment goods and investment in buildings and construction are gathered from business activities, done in parallel surveys in all participating countries. House rental data from the National Accounts is utilized.
Since government services have no economically significant market prices, the costs of wages of the government sector are used as input data on the price side. These figures are collected from Statistics Norway’s Income and Wage Statistics. The price material from these data sources are weighed using expenditure shares from the National Accounts.
Price collections for private consumption are divided into six surveys which are carried out in a three year cycle. The product sample for each survey is undertaken in close cooperation with the participating countries and can vary considerably from one survey to the next (refer to 6.1). The sample is based on information on products and the markets which are collected from establishments and branch organizations in each country. The criteria for the sample are comparability, representativity and equi-representativity. (Refer to 4.1).
The establishment samples are drawn from the Central Register of Establishments and Enterprises at Statistics Norway which are grouped according to Standard Industrial Classification (SIC2002). The choices of samples are based on sales multiplied by a random factor. The sample size varies between surveys. Increased access to extensive electronic information from some sectors makes it possible to undertake an almost full count within some industries.
The capital goods survey is composed of a survey for investment goods and a survey for building and construction projects. The survey is undertaken every other year. The choice of product is carried out in cooperation with participating countries, based on the same criteria as the survey for private consumption. When it comes to investment goods, the choice of establishments is in praxis almost full count for certain product samples. For building and construction projects, representative price materials are gathered from external experts for such projects.
The government services survey is undertaken yearly. Wage costs for specific occupations in the government sector are defined in pursuance to the “International Standard Classification of Occupations (ISCO88)."
Prices are collected through store visits, questionnaires, telephone and internet. For some consumer groups, Statistics Norway receives electronic data from bigger establishments and business chains in the industry. Rental prices are gathered from the CPI’s house rental survey and information on wage costs are gathered from the government by Statistics Norway’s Income and Wage Statistics.
For the rest of private consumption sector data, price collection is undertaken continually over a three year period such that a third of the private consumption is covered in a given year. For the years in between, extrapolation is done based on the Consumer Price Index. House rental data is collected yearly as wage costs from the government. Prices of investment goods and investments in building and construction are collected every other year. For the years in between, extrapolation is done, and partial interpolation is done between the survey years.
Weights for the survey are based on National Accounts expenditure shares and are updated yearly.
Control and revision are done in three phases. The first phase is control of data gathered with the help of standardized extreme control at the product level to identify obvious mistakes. The next revision round is done when the data is compared at the regional group level. Norway is part of the Northern European regional group which is composed of 5 Northern and 3 Baltic countries including Ireland, Great Britain (United Kingdom), The Netherlands and Belguim. After extensive control of the data, the results are submitted to the EUROSTAT who does the calculations for participating countries. A final control is done with all the countries before final results are published.
Countries that collect capital city prices are required to provide spatial adjustment factors with which to convert their capital city prices to national prices. All countries are also required to provide temporal adjustments factors to centre the prices collected in the year t-2 and t on the reference year t. Spatial adjustments factors and temporal adjustment factors are to be supplied for each basic heading. Temporal adjustment factors are also to be supplied at the product level when the products are seasonal.
The method used is the Éltetö-Köves-Szulc- (EKS-) method. For more information regarding the methodology please check the Eurostat –OECD Methodological manual on purchasing power parities. The starting point of the method is the participating counties average prices for all products within each basic heading (refer to 4.1). For each pair of countries price relatives are computed, first with the reference countries product weight (index use of the Laspeyeres –type), after that the reference countries product weight (index of Paasche-type). The geometric average of the Laspeyres- and Paasche index (Index of the Fisher type) is made transitive (refer to 4.1) by computing an unweighed geometric average of the Fischer indexes for each pair of country. These EKS indexes are standardized so that the average value for all the countries is used as basis. The standardized EKS- index constitutes the Purchasing Power Parity for the basic heading.
In the computation of the Purchasing Power Parity for higher aggregates, the aggregate parities for the reference groups are computed in the same way as for the products in the reference group. The difference in the computation is use of weights from the National Accounts, and the use of arithmetic averages instead of geometric averages.
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Purchasing Power Parity
A Purchasing Power Parity (PPP) index is a price relative between one or more country, regions and other “points in space”. If a given product costs 100 Norwegian kroner in Norway and 95 Swedish kroner in Sweden, the Purchasing Power parity between the two countries, for this product is equal to 95/100 = 0.95. The Purchasing Power parity can be computed for individual products or for aggregates, for example the Gross domestic product or for personal consumption. In the calculation and aggregation of PPP, the weights used are the expenditure shares from the National Accounts. Purchasing power parity can be interpreted as an exchange rate in the technical computation of the Purchasing power standards. Please refer to paragraph below.
Purchasing power standards
The Purchasing power standards (PPS) is the name given to the artificial currency unit in which different country’s national currencies are computed to a common currency and common price level, using the PPP. The PPS is a weighted average of the purchasing power of national currencies of the EU Member states. The published value in the PPS is a relative volume value because the price component in each individual country is the same for all the countries (value = price multiplied by volume).
Price level adjustment
Price level adjustment is understood in this context, as the conversion of a monetary value for two or more countries to a common price level or common, technical computed values (purchasing standard) using PPP.
Relative Price level and Price Level Indices
Relative price level is understood as the ratio of the price of an individual product in one country to the price of that same product in some other country at a given point in time. Relative price level is often expressed with the help of Price Level Indexes (PLI). PLI’s are derived by dividing the PPP by the respective nominal foreign exchange rate, and usually multiplied by 100.
Prices
Countries of participating countries are required to price consumer goods and services, capital goods and general government services.
Consumer goods and services: Purchaser’s prices for all consumer products from a variety of outlet types are reported, with the exception for rents. Non refundable taxes, subsidies and discounts are included in the price concept. In most countries, prices are collected in the capital city and the surrounding areas only. In order to obtain national average prices, spatial adjustment factors for all basic headings are required.
Capital goods and services: These prices are collected once every two years. There are two price surveys, one for equipment goods and the other for construction. Prices for equipment goods are obtained from producers, importers, distributors or actual purchasers. The prices collected can be for actual or hypothetical market transactions. Prices for construction on the other hand are to be compiled with a set of standard construction projects covering different types of building and civil engineering works. Prices are calculated in cooperation with experts from building and civil engineering projects.
General government services: Since general government services are non-market services, they are generally valued at cost using prices of the inputs used in their production. However not all inputs are priced, since labour is the most important input, only labour is priced. In principle, the cost data should be national annual averages for each sample occupation, to be extracted from registers or other statistical sources.
Weights and auxiliary data
Some individual products priced are within the frame of the purchasing power survey, aggregated up to more extensive consumer groups. The lowest aggregate level weighed is the basic heading level. These are weighed using expenditure weights from the National Accounts.
Aside from the prices and adjustment factors, participating countries have to provide expenditure weights at basic heading levels, exchange rates and mid-year resident population figures as well are the most recent estimates of GDP and its main sub-aggregates.
Comparability, representativity and equi-representativity
These concepts must be seen in context. The comparison of goods and services being compared across countries are in reality comparisons based on technical specifications. At the same time the goods in the curve must be representative of the consumption pattern in individual countries. It is often necessary to compromise between comparability and representativity. International branded goods will be identical across country borders and thus a high degree of comparability, but at the same time it may not be representative of the consumption pattern.
It is ideal that the components included in the basket of goods are equally representative for all the participating countries. Basket of goods is defined as equally representative when it provides equal satisfaction or utility. Or else there can be skewness in the results because a representative goods basket is assumed to have lower prices than non representative items.
ESA95
The European System of National and Regional Accounts, ESA95 is the national standard that is used for the preparation of the National Accounts in the European Economic Area (EEA) countries. In connection with the purchasing power parity survey, the ESA95 is the frame for the classification of consumption and investment.
Basic heading
A basic heading level is lowest level of aggregation used in the computation for a purchasing power survey. Under the reference group we find individual products which are included in the product samples. At the basic heading level the price material is weighed using figures from the National Accounts while weighing at the product level is digital (representative and not representative product). Explicit consumption weights are not applied when calculating parities for basic headings. But instead at the basic heading level, countries are required to differentiate between “representative” and “unrepresentative” products. Products are defined as representative products if purchased in sufficient quantities for its price level to be typical for that type of product in the national market. Failure to take representativity into account may produce bias in the results. To avoid this bias, products that are representative are assigned a quasi expenditure weight of “1” and for not representative “0”.
Transitivity and multilaterality
The method of computing the data is adjusted such that that there is transitivity in the material. Transitivity means that a comparison between two countries can be done through a third country, with the same results when direct comparison is done. The method results in a matrix with multilateral parities, something which allows replacement with corresponding sizes the missing price information from several countries. Multilateralism means that each change in the data material for a country will have an effect on the result.
Analytical categories
The analytical categories are the main aggregates, the expenditure categories, the expenditure groups and expenditure classes for which the results of the comparisons are published. Examples are personal consumption, clothes and footwear and investment in building and construction.
Purchasing power survey follows the classification of the Gross national products used in relation to ESA95. There has been a detailed classification prepared according to the following main classification:
*Classification of Individual Consumption According to Purpose (COICOP)
*Classification of the Purposes of Non-Profit Institutions Serving Households (COPNI)
*Classification of the Functions of Government (COFOG)
*Statistical Classification of Products by Activity (CPA)
The results are computed according to SNA- (Standard of National Accounts) and ICP- (International Comparison Programme) classifications. The difference between the two classifications is that the SNA classification specifies who pays for the goods and services i.e. private sector or the government, while the ICP delineates according to who actually uses the consumption goods. ICP classification thus includes under the ‘personal consumption” parts of the official consumption or consumption of non-profit organizations which consumes individually, while the SNA classification separates/delineates between household consumption (good and services households buy and pay), consumption of non-profit organizations and government consumption.
Measurement errors
Measurement errors are usually attributed to the measurement gauge. In purchasing power parity a typical error can come from the interview based data collection, where establishments can report price for another quality or volume compared to the product definition. Price gathered manually from shops can also present problems; where prices are defined precisely often demand product expertise from those who gather information.
Processing errors
Errors can occur during the usual processing of data. Such errors are minimal in a Purchasing Power Parity survey.
For questionnaire based survey, the lack of response from establishments varies depending on the type of survey and ranges from 20 to 50 per cent, and where partial non-response is even higher. There is a significant difference in response between the different sub surveys. Establishments that do no respond are replaced if deemed necessary. This is done for products where there are big variations. Substantial use of establishment visits and electronic data instead of interview forms in the later years has contributed to the reduction of non response.
Errors in product choice can be attributed to the non fulfilment of the criteria of comparability, representativity and equi-representativity, refer to 4.1
Establishment samples are chosen by Standard Industrial Classification (SIC2002) from the Central Register of Establishments and Enterprises. Wrong classification of industry or delays and failure to update the central register can be sources of error.
Coordination errors
The National Statistics Offices of participating countries are responsible for the implementation of the survey (establishment sample, data collection and safeguarding of quality). The work is coordinated by EUROSTAT and OECD. Even if there is a strong emphasis on the harmonization of the carrying out of the survey, the differences in interpretation and prioritization in each country can be a source of error. Such errors are often related to the lack of comparability, representativity and equi-representativity, please refer to 4.1.
Tentative estimates in the basis for weights
Expenditure shares from the National accounts expenditure shares is the basis for the weights in the computation, which are estimated from a lower level of aggregation, which gives a source for significant insecurity. Besides these estimates are tentative estimates at the time they are used in the Purchasing Power Parity survey.
The lack of coordination between product choice and extrapolation factors
The price level of goods and services for household consumption are measured once every third year. For the years in between, price material used is from the last survey and extrapolated with the index for the representative goods from the Consumer Price Index. Extrapolation can present a source of error when the representative goods sample for the CPI survey is not the same as for a basic heading in the PPP survey.
The purchasing power survey is primarily a mapping of the participating countries relative price level at a given point in time. The main focus is therefore a comparison between countries in a certain year, while comparability over time comes second. There is a time series created as a result of this work but the purchasing power parity in between years must be interpreted with caution, at least at the lower aggregation level.
The primary purpose of the purchasing power survey is to compute price level adjustment factors for the national accounts. The basic classification is thus the National Accounts expenditures side in relation to the European National Accounts Standard ESA 95.
In a population approximation, the Purchasing Power Parity for a given country in year t+1 must be equal to the purchasing power parity in year t multiplied by the price change in the country relative to a reference country. This gives a link to the CPI, even if the Purchasing Power Parity survey’s focus is comparability in space rather than in time thus making it impossible to reconstruct this statistic from the basis of the other.
EUROSTAT publishes annually price level statistics for certain product groups based on the purchasing power parity surveys. Effective 2009, the main results will be published in EUROSTATs Statistics in focus around the 15th of July. Usually another follow up article is done by Statistics Norway and published in http://www.ssb.no/pppvare/. The complete results of the purchasing power parity survey are available in EUROSTATs statistics database New Cronos
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