Comparison of price levels in Europe

Purchasing Power Parity

Purchasing power parities are price level indicators expressing the price level in a given country at a given time, relative to the price level in one or more other countries. The purchasing power parity between two countries, A and B, expresses the number of units of country B's currency one would need in country B in order to maintain the purchasing power of one unit of country A’s currency in country A. If a given product costs 100 Norwegian kroner in Norway and 10 euros in Germany, the purchasing power parity between the two countries, for this product, equals 10/100 = 0.10 with Norway as the base country, or 100/10 = 10 with Germany as the base. This means we need 0.10 euros in Germany in order to maintain the purchasing power of one krone in Norway, or 10 kroner in Norway in order to maintain the purchasing power of one euro inGermany. Purchasing power parities can be computed for individual products or for aggregates, such as GDP or actual individual consumption. In the calculation of purchasing power parities for aggregates, parities are weighted with expenditure shares from national accounts.

Price level adjustment

Price level adjustment is understood in this context as the conversion of monetary aggregates expressed in national currencies and at national price levels into a common price level and a common, technical currency using PPPs.

Purchasing power standard

The Purchasing power standard (PPS) is the name given by Eurostat to the artificial currency unit in which countries’ national accounts aggregates are expressed when adjusted for price level differences. Figures in PPS are comparable, spatial volume figures because the price component of each individual country has been replaced by a common price component for all countries. The PPS in Eurostat’s terminology corresponds to the term "international dollar" used by the OECD and the World Bank.

Relative price levels and price level indices

The relative price level is understood as the price level of one country relative to the price level of one or several other countries at a given point in time. The relative price level is often expressed as a price level index (PLI). PLIs are derived by dividing the PPP by the respective nominal 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: Purchasers’ prices for a selection of consumer products and services. VAT, non-refundable taxes and possibly subsidies are included in the prices. From 2016, discount prices are included together with the normal prices in the survey. Exceptions are discounts which are not available for all customers.

For housing services, data from the Rental Market Survey is used in order to estimate the price level of both rented and owner-occupied housing. The price of owner-occupied housing is estimated on the basis of owners’ equivalent rent of primary residence principles.

Capital goods and services: Prices for capital goods are collected once every two years. These prices are obtained from producers, importers, distributors or actual purchasers. The prices collected can be for actual or hypothetical market transactions.

The price survey for investment in construction is conducted annually in cooperation with external construction experts. Rates are calculated for various types of standard residential buildings, commercial buildings and civil engineering works, and includes in addition to the pure construction costs contractors' profit margins, the cost of architectural and engineering consultants, and sales tax.

General government services: Since general government services are non-market services, they are generally valued using prices of the input used in their production. Since labour is the most important component in these services, only labour wages are priced. In principle, the cost data should be national annual averages of wages for each sample occupation, to be extracted from registers or other statistical sources.

Government services consumed by private households’ neither have no market prices. This pertains to education and hospital services. The costs of educational services are estimated by Eurostat using a unit price per pupil or student on the basis of existing education statistics. For hospital services quasi-prices are estimated for a range of specified services such as heart surgeries, prostate surgeries and caesarians.

Weights and auxiliary data

Individual products priced within the framework of the ECP are aggregated up to more extensive consumer groups. From the lowest aggregate level (the "basic heading" level) and upwards, weighting is based on expenditure shares from national accounts.

Aside from the prices and adjustment factors, participating countries have to provide expenditure weights at basic heading level, exchange rates and mid-year resident population figures as well as 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 across countries is in reality a comparison based on technical specifications. However, products need to be not only comparable in technical terms, but also representative of the consumption pattern in individual countries. It is often necessary to compromise between comparability and representativity. For example, international branded goods will typically be identical across countries and thus have a high degree of comparability, but at the same time they are not always representative of the consumption pattern.

Ideally, the product sample should be equally representative for all the participating countries ("equi-representativity"). A basket of goods is defined as equally representative in different countries when it provides equal satisfaction or utility. Failure to comply with the requirement of equi-representativity can produce a bias in the results because a representative goods basket can be assumed to have lower prices than a non-representative goods basket.

ESA2010

The European System of National and Regional Accounts, ESA2010, is the international guidline used for the production of national accounts in the European Economic Area (EEA) countries. ESA2010 defines the classification of consumption and investment used in the ECP.

Basic heading

A basic heading is the lowest level of aggregation used in the computation of purchasing power parities. Below the level of the basic heading, we find the individual products of the product sample. In the aggregation process, numerical weights based on a detailed breakdown of national accounts expenditures are applied to each basic heading. Below the level of the basic heading, there are usually no numerical weights.

Transitivity and multilaterality

Transitivity is the property whereby the PPP between any two countries can be estimated through a third country, yielding the same result as a direct comparison. For example, in the case of the three countries A, B and C, the ratio of the PPP between A and B and the PPP between C and B is equal to the PPP between countries A and C. This approach results in a matrix with multilateral parities, something which allows missing price data from one or several countries to be replaced by estimated figures. Multilaterality implies that any change in the input data of any country will have an impact not only on that country, but on all countries in the comparison.

Analytical categories

The analytical categories are the main aggregates, the expenditure categories, the expenditure groups and expenditure classes for which the results of the comparison are published. Examples of aggregated published results are actual individual consumption, clothing and footwear, and investment in building and construction. For consumption, analytical categories mainly follow the national accounts concept of "actual individual consumption". In addition to goods and services bought and paid for by households, actual individual consumption includes public services consumed individually (for example, health and education services), as well as services provided by non-profit institutions serving households.

The ECP follows the classification of GDP as defined in the ESA. Detailed classifications based on the following main classifications have been prepared specifically for the ECP:

*European Classification of Individual Consumption According to Purpose (ECOICOP)

*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)

Name: Comparison of price levels in Europe
Topic: Prices and price indices

Division for Price Statistics

National coverage in each of the 37 participant countries.

Annual data.

The reference period is the actual calendar year. Preliminary results are available in June, 6  months after the end of the reference year. These figures are revised in December, 12,  24 and 36 months after the end of the reference year. At that stage, the results are considered final in the sense that there will be no further updates when countries revise their National Accounts estimates.

The European Comparison Programme (ECP) is an international statistical project in which the National Statistical Offices of the participating countries are responsible for data collection in their respective countries, while the Statistical Office of the European Commission (Eurostat) and the Organisation for Economic Cooperation and Development (OECD) are responsible for calculating the results. The editing of input data is an interactive process between the participating countries and Eurostat. Participating countries provide a formal approval of their data before Eurostat and OECD calculate and publish the results.

Price data in anonymised form are stored in Eurostat’s production database. Statistics Norway stores micro data and information on sampling units and population according to the relevant safety regulations.

The purpose of the European Comparison Programme is to produce indicators of the relative price levels across participating countries. A central concept is the purchasing power parity (PPP), cf. "definitions".

The results of the ECP are used primarily in order to adjust national accounts aggregates for price level differences across countries, so that only spatial volumes are taken into consideration in international comparisons. For example, in comparing GDP per capita (which is composed of a price and a volume component), using the nominal exchange rate would lead to an overvaluation for countries with high price levels, while the opposite effect would occur for countries with low price levels.

The work is coordinated by Eurostat and the OECD. Eurostat coordinates the work in 37 European countries, including Norway, while OECD coordinates a similar exercise in the non-European OECD member states. The results from Eurostat and OECD are included in the International Comparison Program (ICP), which is carried out by the World Bank on behalf of the United Nations. The Statistical Office of the European Union started to finance around 70% of the work from 2011.

The first set of results which included data from Norway were released in 1980, followed by updated releases in 1985, 1990 and 1993. From 1995 onwards, results for Norway have been published by Eurostat on an annual basis. Every third year, the OECD prepares results for all OECD countries, as well as estimates based on extrapolation for the years in between.

The main institutional users are the European Commission and the International Monetary Fund (IMF). The basis for the distribution of funds to the EU’s poorer regions is the comparable, price level adjusted income level in the various regions. Purchasing power parities are an important input into these calculations, and thus the European Commission contributes substantially to the financing of the programme. In the IMF, price level adjusted GDP is one of several factors that determine the level of member states’ financial contribution.

In general terms, PPPs can be used as currency converters, as an alternative to the nominal exchange rate. PPPs are preferable to exchange rates 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 should be maintained. PPPs are applied for this purpose in businesses, government administration, research, poverty analyses and the media.

Purchasing power parities are used not only for price level adjustments, but also in analyses of relative price levels.

Access to results prior to publication

While Statistics Norway is in charge of the collection and editing of the Norwegian input data, the results for all participating countries are first published by Eurostat. These results are then accessible to all users. Immediately after Eurostat's release, usually on the following day, Statistics Norway re-publishes the results on its website.

No external users have access to the statistics and analyses before they are published and accessible simultaneously for all users on ssb.no at 8 am. Prior to this, a minimum of three months' advance notice is given inthe Statistics Release Calendar. This is one of Statistics Norway’s key principles for ensuring that all users are treated equally.

The primary purpose of the ECP is to compute price level adjustment factors for national accounts. The basic classification used in the survey is thus the national accounts expenditures breakdown as defined in the European Standard of National Accounts (ESA2010).

In a population approach, the purchasing power parity for a given country in year t+1 should equal the purchasing power parity in year t multiplied by the price change in that country relative to a reference or base country. This provides a link to the CPI, although the ECP focuses on spatial rather than temporal comparability. However, it is not possible to reconstruct either statistic on the basis of the other.

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 population is defined by the expenditure side of the National Accounts (cf. ESA) as final consumption in private households and non-profit organizations, government consumption and gross capital formation. This means that goods and services that are used for these purposes are covered by the price surveys.

Prices of goods and services for private consumption, investment goods and investment in buildings and civil engineering works are collected from establishments in surveys carried out simultaneously in all participating countries. The price collection for private consumption is divided into six surveys which are carried out in a three year cycle. The product sample for each survey is decided upon by the participating countries in close cooperation, and can vary considerably from one survey to the next.

Product sampling:The total number of products (goods and services) is around 2500. The sample is based on information on products and markets which is collected from businesses and business associations in each country. The sampling criteria are comparability, representativity and equi-representativity (see definitions).

Establishment sampling: The sample of establishments is drawn from the Central Register of Establishmentsand Enterprises at Statistics Norway and is the same sample used in the consumer price index (CPI). Samples are drawn on the basis of the establishments’ turnover. In addition, it is often necessary to supplement the sample on an ad hoc basis (purposive sampling).

Weights: Individual products priced within the framework of the ECP are aggregated up to more extensive consumer groups. From the lowest aggregate level (the "basic heading" level) and upwards, weighting is based on expenditure shares from national accounts.

For housing services, data from the Statistics Norway's Rental market survey and housing stock data are used.

The Norwegian Directorate of Health provides the input data in the hospital services survey.

Since government services have no economically significant market prices, one possible approach is to use salary cost in the government sector as an approximation. Salary data for a range of occupations defined in accordance with the"International Standard Classification of Occupations" (ISCO-08) are collected annually. This ensures comparability between countries. In Norway, the salary data are based on Statistics Norway’s Income and Wage Statistics. 

Government services consumed by private households’ neither have no market prices. This pertains to education and hospital services. The costs of educational services are estimated by Eurostat using a unit price per pupil or student on the basis of existing education statistics. For hospital services quasi-prices are estimated for a range of specified services such as heart surgeries, prostate surgeries and caesarians.

The capital goods survey is composed of one survey for investment goods and another survey for building and civil engineering projects. The survey for investment goods is undertaken every other year. The product sample is selected in cooperation among the participating countries, based on the same criteria as the survey for private consumption. For building and construction projects, prices are gathered annually from external experts.

Prices are mainly collected through shop visits, telephone and internet. In addition, for some groups of consumer goods, Statistics Norway receives electronic data from important establishments and business chains. Rental prices based on Statistics Norway’s Rental Market Survey and Population and Housing Census are gathered from the national accounts, while information on salary costs is gathered from Statistics Norway’s Income and Wage Statistics.

For the rest of private consumption data, the price collection is undertaken continuously over a three year period such that one third of private consumption is covered in a given year. For the years in between, survey results are extrapolated using CPI data as extrapolation factors.

Data on rents and on public sector salaries are collected annually. Prices of capital goods are collected every other year, while prices of construction projects are collected annually.

Weights based on national accounts expenditure shares and updated yearly.

Data editing is carried out in phases. Editing starts with intra-country assessment before submitting the price data to Eurostat. This intra-country phase checks the input data using a standardized extreme control at the product level in order to identify obvious mistakes. The next editing round is comparison of the Norwegian data against other participating countries in the survey- 37 countries. Eurostat calculates the final results after extensive control. Final check and approval rounds are done in all the countries before the final results are released.

Most countries collect capital city prices and thus are required to provide spatial adjustment factors with which to convert these prices to national average prices. All countries are also required to provide temporal adjustments factors to ensure that the prices represent the annual average. Spatial adjustments factors and temporal adjustment factors should be supplied for each basic heading. For seasonal products, special temporal adjustment factors should be supplied at product level.

The computation method used is the so-called Éltetö-Köves-Szulc (EKS) approach. This approach starts off with all participating countries’ average prices for each product within a basic heading. For each pair of countries, all possible bilateral price relatives are computed, first with the weights of the base country (Laspeyres-type indices), then with the weights of the reference country (Paasche-type indices) The geometric average of the Laspeyres and Paasche indices (Fisher-type indices) are made transitive by computing an unweighted geometric average of the Fisher indices for each pair of countries. These EKS indices are rebased to the average value across all countries. These rebased EKS indices are the final PPPs for the basic heading. PPPs at higher levels of aggregation are computed in the same way as the basic heading PPPs, except that numerical weights from National Accounts are applied in the aggregation process, and that arithmetic averages are used instead of geometric averages. For further information on the calculation of PPPs, see the Eurostat-OECD methodological manual on PPPs.

The CPI data is the source used in the seasonal adjustment work.

Data from respondents are used in accordance with the requirements of The Norwegian Data Protection Authority. The information is confidential (Statistics Act, § 2-4) and is stored and ultimately destroyed in accordance with strict security guidelines.

The production of purchasing power parities is in its nature an example of international statistical cooperation. The input data must therefore necessarily be made available to the participating countries’ national statistical institutes, Eurostat and the OECD.  However, data is anonymised before they are shared with the other participants in the programme.

External users can apply to Eurostat or the OECD in order to access these data for research purposes, provided that the data are not published.

The purchasing power parity survey is primarily a mapping of the participating countries’ relative price level at a given point in time. The primary focus is therefore a comparison between countries in a certain year, while comparability over time comes second. Time series created as a result of this work must be interpreted with caution, and even more so at lower levels of aggregation.

Price level adjustment of national accounts aggregates in current, domestic prices results in a time series in current, common prices. Therefore, one cannot calculate real growth on the basis of such a time series.

Measurement- and processing errors

Measurement errors are errors caused by insufficient or inappropriate measurement techniques. In the ECP, such errors can occur if, for example, a respondent quotes the price of a product which does not conform to the specifications with regard to quantity or quality. The same challenge occurs during shop visits, since price collectors sometimes have insufficient expertise to judge whether a given product fits the specifications.

Processing errors occur during the regular processing of data. Such errors are not very frequent in our context.

Failure to respond

In questionnaire based surveys, failure to respond has typically varied between 20 and 50 percent, with partial non-response rates even higher. Establishments which fail to respond are replaced if deemed necessary. This is done for products with substantial variation in the price material. Shop visits and the use of electronic data instead of questionnaires have contributed to reducing the non-response rate.

Sampling errors

Errors in the product sample can be due to non-compliance with the criteria of comparability, representativity or equi-representativity, cf. above. The outlet sample is drawn from the Central Register of Establishments and Enterprises. Incorrect classification and failure to update this register can sometimes be a source of error.

Coordination errors

While the ECP is coordinated by Eurostat and the OECD, the National Statistical Offices of the participating countries are responsible for the implementation of the programme, in particular the data collection process. Although there is a strong emphasis of harmonization, differences in interpretation and priorities in each country can be a source of error. Such errors are often related to insufficient comparability, representativity or equi-representativity.

Uncertain and preliminary weight estimates

The expenditure shares from national accounts, which are used as weights in the aggregation process, are estimates at a very low level of aggregation. This creates considerable uncertainty. Furthermore, these estimates are often preliminary at the time when they are incorporated into the calculations.

Incoherence of product sample using extrapolation factors

The price level of goods and services for household consumption is surveyed once every third year. For the years in between, the prices from the most recent survey are extrapolated with temporal price indices for the corresponding product group. These indices are taken from the consumer price index. Extrapolation can represent a source of error if the product sample of the CPI is not the same as in the ECP.

Revision

Revision are changes of published figures (for example publishing of final data to replace preliminary figures). The PPP manual describes in 13.26 rules for revision. The PPP Regulation allows for final calculations to be repeated if there has been a mistake made by either a participating country, Eurostat or the OECD. A mistake is defined as "a use of incorrect basic information or an inappropriate application of a calculation procedure". For the recalculation to take place, the mistake must be discovered within three months of publication of the final results. For the results of the recalculation to be published and to replace the results initially disseminated, the mistake must cause at least a change of 0.5 per cent in the real GDP per capita of at least one participating country.