International price comparisons based on purchasing power parity

International price comparisons based on purchasing power parity

Michelle A. Vachris

Because exchange rate movements, in general, tend to be more volatile than changes in national price levels, the purchasing power parity approach provides the proper basis for comparing living standards and examining productivity levels over time

Imagine you are planning a trip to France and would like to figure out how much currency you will need during your visit. You would need to know how much in French francs it would cost for incidentals such as meals, sightseeing, and souvenirs. What information would be helpful to you in making your estimate? You could check the price of, say, a lunch in your hometown and then convert that figure into francs using the exchange rate. This type of estimate would not be very accurate, however, because it is likely that a lunch in your hometown costs relatively more or less than a lunch in France. A better estimate would be based on the price of a lunch in France.

Similarly, if you were opening a subsidiary company in Japan, how would you determine the salaries for your employees? Again, using the exchange rate to convert the salary you would pay in the United States into yen would not be accurate. To adequately compensate employees moving overseas, you would need information about the cost of living in Japan.

Finally, if a government or international organization were comparing national expenditures across different countries, merely collecting the gross domestic products (GDPs) of the countries and using exchange rates to convert them into a single currency would not yield an accurate comparison. Again, the comparison based on exchange rates does not take into account differing prices among the countries.

In each of these scenarios, analysts could construct better estimates if they convert the data into a common currency and value it at the same price levels. In September 1998, the Organisation for Economic Co-operation and Development (OECD) released price level data and measures for 1996 as a part of the Eurostat-OECD purchasing power parity (PPP) program. (Eurostat is the statistical office of the European Union.) The purpose of this program is to compare economic data across countries without using exchange rates. As illustrated in the previous scenarios, exchange rates do not necessarily reflect the relative purchasing powers of the different currencies and applying them can produce inaccurate comparisons. To accurately compare GDP data across countries, one must express the data in a common currency and value it at the same price level. These problems are similar to those encountered in comparisons of GDP across time for one country. Of course in the case of comparison across time, the data are already expressed in one national currency, but the figures must accommodate changes in the price level for the comparisons to have any meaning. Purchasing power parities are estimates derived from the relative price levels in different countries and reflect the rate at which currencies can be converted to purchase equivalent goods and services. Therefore, a PPP is the rate of currency conversion that equalizes purchasing power of different currencies and so has the dimensions of an exchange rate as well as a price index. PPPS are preferable to exchange rates for converting national expenditure data into a common currency because they also adjust for differences in price levels and reflect only differences in the volume of goods and services purchased between countries.

International organizations involved with multilateral comparisons of real GDP and its components increasingly base such comparisons on PPPS.(1) The European Commission also uses PPPS to determine funding levels, as well as to adjust staff salaries. Moreover, two recent reports analyzed the strengths and weaknesses of the PPP programs.(2) Independently, both came to the same conclusion, reaffirming the importance of using PPPs for real multilateral comparisons of GDP and related aggregates.

Historically, the first comprehensive investigation of the relative value of money in different countries was published in 1940 by Colin Clark. This study compared the purchasing power of many currencies across a range of consumption goods. In the early 1950s, Irving Kravis and Milton Gilbert, at the Organization of the European Economic Community (predecessor to the OECD), used national accounts data to compare national incomes of four western European countries and the United States. The methodology they developed was further refined in benchmark studies for 1970, 1973, and 1975.(3) In the early 1980s, the Eurostat-OECD PPP program was later established independently, with its own methodology, timetable, and mission to compare national incomes and price levels for the European Union and OECD member countries. Benchmark studies were published under this program for 1980, 1985, 1990, and 1993.

This article analyzes the 1996 Eurostat-OECD purchasing power parities study, which covers 32 countries, including all of the current 29 member countries of the OECD, except one (Korea), plus four additional countries (Israel, Russian Federation, Slovak Republic and Slovenia).

Methodology

Purchasing power parities measure relative price level differences for one time period across countries. In that respect, PPPs can be thought of as interspatial price indexes, and the methodology and data requirements belong to the methodology of index number theory. For example, to calculate intertemporal price indexes used to measure price change for one country over time, one needs to price a representative basket of goods and services with the expenditure patterns in the country determining the items selected. Likewise, to calculate PPPs, one needs to price a representative basket of goods and services across countries. In the interspatial case, however, this becomes difficult to implement, as the different countries can have very different expenditure patterns. The availability of common representative products is dependent on the number of countries, the extent to which their markets and expenditure patterns are similar, and the type of specification used to define selected products. Even between economies as similar as the United States and Canada, there remain important differences in expenditure patterns due to differences in climate, tastes, packaging, regulations, and the like. Therefore, the initial groundwork for calculating PPPS is to determine a list of goods and services and their detailed specifications for pricing by each country. The final lists for the 1996 comparison contained both traded and nontraded goods and services that covered around 4,000 items, including about 2,900 consumer goods and services; 800 pharmaceuticals; 186 capital goods; 50 motor vehicles; 34 government, education, and health services; and 20 construction projects.

The second component needed to calculate purchasing power parities is the expenditure patterns for the participating countries. These figures, expressed in national currencies, are derived from the national accounting data for each country. The classification system that provides the framework for the calculations is the 1968 System of National Accounts and the 1979 European System of Economic Accounts. The definition of expenditure starts at the basic heading level, which includes a group of similar commodities that are representative of the purchases made in participating countries for which a sample of detailed item specifications can be determined. Eurostat had 270 basic headings, while the OECD had 218. The difference between the two headings was attributed to the category, household final consumption expenditures; otherwise, the breakdowns were the same.

Once the detailed specifications of goods and services have been defined within the expenditure categories, each participating country provides national average prices for as many of the items as possible. Possibly, the most important issue in price selection is choosing identical products that are also important in terms of expenditure patterns. These prices, expressed in national currencies, are for the most part, transaction prices, although in some cases, list prices are used as a proxy. Many of the countries perform special pricing surveys to meet the requirements of the program; however, the United States primarily provides prices calculated from data already collected by the Consumer Price Index (CPI) and Producer Price Index (PPI) programs. The Bureau of Labor Statistics does not do any special sampling for the OECD item specifications and, as a result, the average prices provided are not the same as the average price series produced by the CPI. Where possible, BLS adjusts the underlying data from the CPI average price series to match the OECD questionnaire specifications. If insufficient average price data exist to estimate OECD specifications, then list prices are used in lieu of, or to supplement average price data when necessary. In particular, all of the OECD transportation survey, most of the clothing survey, and some of the consumer durables and furniture surveys contain list prices for the United States. In addition, by using regression methods and rent data collected for the CPI, the United States is able to estimate prices for the rent specifications priced by the other participating countries. Ideally, the price surveys are completed on a flow basis over 3 years, and prices are moved forward to the benchmark year with intertemporal price indexes provided by each country.

From the matrices of prices submitted by each country, unweighted bilateral price ratios (parities) are calculated. The resultant bilateral comparisons illustrate the quantities of “country A” at the prices of “country B” and the quantities of “country B” at the prices of “country A.” Obviously, all item specifications cannot be priced by all countries due to differences in what is available on the market, so missing parities are imputed from the existing data. These unweighted parities are then aggregated using the expenditure data provided by the countries. Finally, the purchasing power parities, thus calculated, are used to convert the national expenditures into a common currency and price level, as well as to construct price level indexes for analytical purposes. A country’s price level index is used to interpret whether average prices are high or low, relative to a base country or a country grouping. The price level index is derived by simply taking the PPP-to-exchange-rate ratio.

Presentation and analysis of results

The 1996 purchasing power parities, exchange rates, and price level indexes for all of the participating countries are presented in table 1, with the U.S. dollar as the reference currency. Although the U.S. dollar is the reference currency, the associated PPPS refer to the price structure of the group as a whole, not just the U.S. domestic price structure. With the OECD equal to 100, the most expensive country was Switzerland, at 151, and the least expensive was the Slovak Republic, at 36. As shown in chart 1, prices in the United States were slightly below those of the OECD as a whole in 1996, with an index value of 91. If a country’s price level index is less than 91, then purchases made with a dollar converted at market exchange rates in that country are less expensive, compared with making the same purchases in the United States. Likewise, a value greater than 91 means U.S. prices are relatively cheaper. In general, the currencies of the lower income countries–including the former communist countries as well as Turkey, Mexico, Portugal, and Spain–were undervalued, relative to the U.S. dollar. In other words, a U.S. dollar converted at market exchange rates has greater purchasing power in a lower income country than in the United States.

[Chart 1 OMITTED]

Table 1. Purchasing power parities, exchange rates,

and price level indexes, 1996

(National currency per U.S. dollar)

Purchasing Price

Country power Exchange level

parity rate Indexes

United States 1 1 91

OECD(1) 1.1 1 100

Australia 1.3 1.278 92

Canada 1.19 1.363 79

Czech Republic 11.7 27.15 39

Hungary 72.6 152.6 43

Iceland 76.8 66.71 104

Japan 166 108.8 138

Mexico 3.79 7.601 45

New Zealand 1.48 1.455 92

Norway 9.11 6.459 128

Poland 1.36 2.661 46

Switzerland 2.05 1.236 151

Turkey 39.3 81.4 44

European Union(2) .922 .788 106

Austria 13.6 10.59 116

Belgium 36.8 30.97 108

Denmark 8.33 5.799 130

Finland 5.89 4.593 116

France 6.57 5.117 116

Germany 2.03 1.505 122

Greece 214 240.8 81

Ireland .673 .625 98

Italy 1583 1544 93

Luxembourg 39.7 30.97 116

Netherlands 2.04 1.686 110

Portugal 122 154.3 72

Spain 124 126.7 89

Sweden 9.68 6.71 131

United Kingdom .641 .6441 91

Israel 3.25 3.192 92

Russian, Federation 2191 5124 39

Slovak Republic 12.2 30.65 36

Slovenia 96 135.4 64

(1) The OECD presently includes 29 countries: the European Union (15), Australia, Canada, Czech Republic, Hungary, Iceland, Japan, Korea, Mexico, New Zealand, Norway, Poland, Switzerland, Turkey, and the United States. Korea is not included in this analysis.

(2) Currently, there are 15 countries in the European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

SOURCE: OECD.

One explanation for low-income countries having prices lower than high-income countries is that prices are cheaper for nontraded items, such as housing and services. This idea is based on the theory that the differences in prices broadly reflect differences in productivity; therefore, high-income countries have more productive labor forces than low-income countries. The differences in productivity are particularly significant for traded goods, and are reflected in higher wages and prices. As a country develops, theoretically, its productivity in the traded goods sector increases faster than that for nontraded goods; nonetheless, firms making nontraded goods must also pay higher wage rates. The higher productivity for traded goods in high-income countries, therefore, results in higher wages and prices in both the traded and nontraded goods sectors, relative to wages and prices in low-income countries.

It is important to note that the PPPs published by the Eurostat-OECD program are not intended to be used as proxies for equilibrium exchange rates. They are calculated to facilitate international comparisons of prices and volumes for GDP and its components. Purchasing power parities as equilibrium exchange rates have long existed in international trade theory? PPP theory predicts that in equilibrium, a dollar should buy the same basket of goods and services in all countries, as free trade causes prices in the various countries to converge. In the long run, then, the exchange rate between two countries should reflect the ratio of the price levels. The relationship between exchange rates and PPP has been studied numerous times over the years and a variety of reasons have been provided to describe why exchange rates and PPPs diverge. One important difference between the data published by the Eurostat-OECD program and theoretical purchasing power parities is that the equilibrium exchange rate PPPS only refer to domestically produced tradable goods and services that are valued at export prices. In contrast, the PPPS presented in this article cover the entire range of final goods and services included in GDP estimates; many of which are not tradable and some of which are imported. Furthermore, the prices of traded goods could diverge for a number of reasons such as price discrimination; incomplete exchange rate pass through(5); currency fluctuations related to financial assets; or barriers to trade, such as quotas, taxes, tariffs, or transportation costs.

The primary purpose of the Eurostat-OECD estimated PPPS, however, is not to predict future exchange rate movements, but rather to convert national expenditure data into a common currency. Table 2 presents GDP per capita for all countries, expressed in both nominal and real terms. The nominal values are converted into U.S. dollars using exchange rates, while the real figures are converted using PPPs. Just as real-inflation-adjusted GDP per capita is recognized as the appropriate measure of living standards within a country, adjusted price differences across countries are just as important because such measures are used to adjust for price differences over time. The differences between the nominal and real figures illustrate the importance of correcting for differences in price levels when making international comparisons. The results show that even within a group of similar economies, there are significant differences between nominal and real per capita GDP. For the United States, the conversion using PPPS results in a GDP, per capita estimate that ranks second among the 32 participating countries, as opposed to ninth, using the nominal data. The top 10 countries in real and nominal terms are illustrated in the box. These rankings of the countries in terms of GDP per capita can be greatly influenced by the use of the PPP data, as opposed to exchange rates. As can be seen from table 2, the PPP-based measures of real GDP per capita for Japan and the West European countries are not as high, relative to the United States, as the nominal market exchange rate-based measures would suggest.

Table 2. Gross domestic product per capita 1996

Nominal Nominal

Country GDP per capita ranking

Luxembourg 40,621 2

United States 27,831 9

Norway 35,968 4

Switzerland 41,424 1

Japan 36,509 3

Iceland 27,000 10

Denmark 33,229 5

Canada 19,767 17

Belgium 26,403 11

Austria 28,383 8

Germany 28,738 7

Australia 21,611 15

Netherlands 25,507 13

France 26,189 12

Italy 20,764 16

Sweden 28,755 6

United Kingdom 19,611 19

Finland 24,424 14

Ireland 19,632 18

New Zealand 17,850 20

Israel 17,679 21

Spain 14,892 22

Portugal 10,960 24

Slovenia 9,471 25

Greece 11,745 23

Czech Republic 5,473 26

Hungary 4,431 27

Slovak Republic 3,533 29

Mexico 3,580 28

Poland 3,530 30

Russian Federation 2,906 31

Turkey 2,894 32

European Union(1) 22,986

OECD(2) 21,903

Real Real

Country GDP per capita ranking

Luxembourg 35,113 1

United States 30,694 2

Norway 28,113 3

Switzerland 27,504 4

Japan 26,447 5

Iceland 25,882 6

Denmark 25,521 7

Canada 25,078 8

Belgium 24,490 9

Austria 24,406 10

Germany 23,525 11

Australia 23,440 12

Netherlands 23,199 13

France 22,488 14

Italy 22,332 15

Sweden 21,987 16

United Kingdom 21,537 17

Finland 21,019 18

Ireland 20,130 19

New Zealand 19,379 20

Israel 19,131 21

Spain 16,822 22

Portugal 15,236 23

Slovenia 14,728 24

Greece 14,581 25

Czech Republic 14,017 26

Hungary 10,281 27

Slovak Republic 9,792 28

Mexico 7,920 29

Poland 7,593 30

Russian Federation 7,497 31

Turkey 6,617 32

European Union(1) 21,660

OECD(2) 21,903

(1) Currently, there are 15 countries in the European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

(2) The OECD presently includes 29 countries: the European Union (15), Australia, Canada, Czech Republic, Hungary, Iceland, Japan, Korea, Mexico, New Zealand, Norway, Poland, Switzerland, Turkey, and the United States. Korea is not included in this analysis.

SOURCE: OECD.

For the poorer countries, the conversions using PPPS generally do not yield huge differences in the rankings; however, the differences in the GDP per capita levels for these countries can be quite large. In some cases, for example, Mexico, the real GDP per capita is more than double that of the nominal value. Although comparing the less developed countries with the most developed is analogous to comparing real output between distant time periods, generally, it can be said that the gap between high-income countries and low-income countries narrows when purchasing power parities are used. As discussed earlier, the exchange rates of less developed countries are typically undervalued. Therefore, in poorer countries, labor-intensive services such as haircuts are cheaper than such services in rich countries, and using exchange rates to convert local currency GDPS into dollars understates the value of their output relative to rich countries.

The relationship between the nominal and real figures does not remain stable over time. Exchange rate movements are much more volatile than PPPs, which tend to move gradually with relatively small fluctuations. In particular, the estimated nominal figures in 1996 are quite different from previous-year estimates. An advantage of level comparisons based on PPPS is that actual output of goods and services in different countries does not change every time exchange rates between countries change as comparisons based on market exchange rates would imply. Comparative price level indexes, which incorporate market exchange rates in their calculation, subsequently are also more volatile.

When exchange rate movements are more rapid and of greater magnitude than changes in relative prices, using them as conversion factors to estimate real expenditures becomes meaningless. This is clearly demonstrated in chart 2 (top panel), which shows the GDP of Japan expressed as a percentage of the United States GDP for selected years. The comparisons are based on the conversion of GDP at current exchange rates and current PPPs, with the extent of divergence between the two bases over the 1970-97 period. In this example, if the 1995 ratios based on exchange rates are compared with those for 1985, Japan’s GDP relative to the United States, more than doubled, increasing 120 percent. Using the PPP results, however, yields a much more modest increase of 12 percent over the 10-year period. Moreover, if market exchange rates are used as the conversion factor, then the implication is that the relative standard of living of Japan fell 27 percent over the following 2-year period from 1995 to 1997. The PPP results show a dip of only 2.7 percent over that same period.

[Chart 2 OMITTED]

Similarly, the movement of the Deutsche Mark versus the U.S. dollar has resulted in large fluctuations in the nominal GDP of Germany expressed as a percentage of U.S. GDP. (See chart 2, center panel.) Between 1970 and 1978, the GDP of Germany relative to the United States increased 57 percent, based on market exchange rates, whereas the same comparison based on PPPs, resulted in a modest 4-percent decline instead. Moreover, paralleling the depreciation of the mark, nominal GDP as a percentage of the U.S. GDP fell 22 percent between 1995 and 1997, compared with a 4.5-percent real decline. On the other hand, a comparison between Canada and the United States reveals exchange rate movements that are far less pronounced, resulting in a more stable relationship between nominal and real GDP movements. (See chart 2, bottom panel.) Because exchange rate movements, in general, tend to be more volatile than changes in national price levels, the PPP approach obviously provides the proper basis for comparing living standards and examining productivity levels internationally over time.

PPPS also can be used to examine differences in the structure of real expenditures across countries. Expenditure patterns for selected components of GDP are presented in table 3. To compute the structure of real expenditures, the data are converted to common currency using PPP, then the percentages are computed. More than two-thirds (70.1 percent) of the U.S. GDP is attributed to private consumption expenditures, the second highest percentage of all of the participating countries. The United States spent 12.4 percent of its GDP, on government expenditures and 17.5 percent of its GDP on gross fixed capital formation; these figures are relatively low, compared with the OECD as a whole. In terms of government spending per capita, Luxembourg, Germany, and Japan had the lowest figures reported in the OECD (10.6 percent for Luxembourg, 10.7 percent for Germany, and 10.9 percent for Japan). Predictably, government spending was higher among the transition economies of Poland, Slovakia, the Czech Republic, Russia, and Hungary than that for the other participating countries. Japan reported the highest level of private investment spending, by far, at 32.8 percent of GDP.

Table 3. Comparison of real expenditure patterns as a percent of

gross domestic product, selected countries, 1996

Country Private Government Gross fixed

consumption consumption capital formation

United States 70.1 12.4 17.5

OECD(1) 64.2 15.2 20.6

Australia 61.5 18.0 20.4

Canada 60.4 18.9 20.7

Czech Republic 44.2 34.6 21.2

Hungary 49.4 37.1 13.5

Iceland 55.1 26.4 18.5

Japan 56.3 10.9 32.8

Mexico 65.0 21.0 14.0

New Zealand 62.8 16.7 20.5

Norway 50.7 22.6 26.7

Poland 54.2 31.8 14.1

Switzerland 64.2 11.2 24.6

Turkey 61.1 20.5 18.4

European Union(2) 63.0 17.2 19.8

Austria 55.0 19.7 25.3

Belgium 65.3 15.0 19.7

Denmark 54.4 27.3 18.3

Finland 54.3 24.9 20.8

France 60.4 19.3 20.4

Germany 67.7 10.7 21.6

Greece 64.9 17.0 18.0

Ireland 80.2 18.1 21.7

Italy 64.5 17.0 18.6

Luxembourg 65.4 10.6 24.0

Netherlands 63.7 15.0 21.3

Portugal 56.1 24.8 19.1

Spain 62.9 17.0 20.1

Sweden 54.6 28.1 17.3

United Kingdom 81.5 21.8 16.7

Israel 48.4 26.0 25.6

Russian Federation 48.9 36.6 14.4

Slovak Republic 44.1 33.6 22.3

Slovenia 53.0 27.5 19.4

(1) The OECD presently includes 29 countries: the European Union (15), Australia, Canada, Czech Republic, Hungary, Iceland, Japan, Korea, Mexico, New Zealand, Norway, Poland, Switzerland, Turkey, and the United States. Korea is not included in this analysis.

(2) Currently, there are 15 countries in the European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

SOURCE: OECD.

In addition, the components of national expenditure have different underlying price levels and can be disaggregated into various personal consumption categories such as clothing, education, and transportation, as well as government expenditures, construction costs, and capital equipment purchases. Table 4 presents comparative price levels for final expenditure categories of GDP for the top 20 countries, based on GDP per capita ranking. Among the expenditure breakdowns, the index for private final consumption of goods and services is the most interesting for bargain-hunting tourists. The index, however, covers a number of items, such as rent and medical care that reflect domestic demand, rather than the expenditure pattern of the average tourist. It would be necessary to adjust the weights to reflect the spending patterns of a casual visitor to use the index for international bargain shopping.

[TABULAR 4 NOT REPRODUCIBLE IN ASCII]

Comparison of 1996 results

Every 3 years, the OECD-Eurostat PPP program estimates new benchmark PPPs. Although the 1996 results are generally consistent with findings from previous PPP studies, the data from the 1996 survey are not directly comparable with past surveys. The purpose of the PPP program is to compare the same market basket for several countries at the same time, hence some differences in results across surveys are to be expected. Table 5 shows the ranking based on volume and the associated volume indexes for 1993 and 1996 for all countries participating in the survey. The volume indexes are calculated using PPPS as the conversion factor. The general reasons for the differences in results between the two benchmarks are changes in expenditure patterns, relative price structure, product lists, and methodology. Norway and Iceland had the largest upward movement in ranking from 1993 to 1996. Norway’s gain was largely attributable to an increase in expenditures, whereas the rise for Iceland was primarily due to a drop in relative prices. It should be noted that domestic changes in volumes, prices, and expenditures, as well as prices of other countries will affect the ranking.

Table 5. Country rank and Index of benchmark

purchasing power parities for 1993 and 1996

Country Rank, Volume Index, Rank, Volume Index,

1993 1993 1996 1996

Luxembourg 1 144 1 160

United States 2 128 2 140

Switzerland 3 121 4 126

Japan 4 107 5 121

Canada 5 102 8 114

Belgium 5 102 9 112

Denmark 7 101 7 117

Austria 7 101 10 111

Norway 9 100 3 128

France 10 99 14 103

Iceland 10 99 6 118

Germany 12 97 11 107

Netherlands 13 93 13 106

Italy 14 92 15 102

Australia 15 91 11 107

United Kingdom 16 89 17 98

Sweden 17 88 16 100

Finland 18 82 18 96

New Zealand 19 81 20 88

Ireland 20 73 19 92

Spain 21 70 22 77

Portugal 22 62 23 70

Greece 23 57 24 67

Turkey 24 28 32 30

Israel (1) (1) 21 87

Slovak (1) (1) 24 67

Czech Republic (1) (1) 26 64

Slovak Republic (1) (1) 28 45

Hungary (1) (1) 27 47

Poland (1) (1) 30 35

Russian Federation (1) (1) 31 34

Mexico (1) (1) 29 36

(1) Did not participate in the 1993 survey.

SOURCE: Key Indicators of the Labour Market, International Labor Organization.

Future plans

Even before the 1996 data were published, the participating countries began pricing for the 1999 benchmark study. The pricing process includes updating the lists of product specifications to ensure that representative items from all participating countries are included in the exercise. In May 1998, the International Price Program of the Bureau of Labor Statistics hosted a meeting of representatives from the U.S., Canada, Mexico, Australia, and the OECD to develop and discuss possible updates to the product specifications. Many of the items discussed will be included in the 1999 pricing round.

Also discussed at these meetings were possible areas for methodological research that could be used in future benchmark studies. For example, education and health care are troublesome comparisons from an international standpoint, in part, because of the vast differences in government subsidization of these services. Pricing high-technology goods, such as computers, is complicated by the fast pace of technological change which makes it difficult to identify and price similar products in countries that may be at differing levels of development. Participants at the May 1998 meetings agreed to undertake a closer examination of these and other areas in an attempt to improve the comparisons.

While representatives of the European countries participate in regular meetings under the auspices of Eurostat, the May 1998 meetings provided a unique opportunity for representatives from the non-European countries of the study to exchange ideas and experiences. Future meetings of this working group are planned to build on this progress with the next scheduled meeting in November 1999.

Top 10 countries in terms of gross domestic

product per capita, 1996

Real GDP Nominal GDP

Luxembourg Switzerland

United States Luxembourg

Norway Japan

Switzerland Norway

Japan Denmark

Iceland Sweden

Denmark Germany

Canada Austria

Belgium United States

Austria Iceland

Notes

(1) For example, PPPs ale used in numerous publications, such as the World Economic Outlook, International Monetary Fund; Human Development Report, United Nations; World Development Indicators, World Bank; National Accounts and Main Economic Indicators, the OECD; and National Accounts and Comparisons in Real Terms of the Aggregates of the European System of Economic Accounts, Eurostat.

(2) See Ian Castles, “Review of the OECD-Eurostat PPP Program” (Consultant to the OECD, June 1997); and Jacob Ryten, “The evaluation of the International Comparison Project (ICP)” (Consultant to the International Monetary Fund, Statistic Division of the Department of Economic and Social Affairs of the United Nations Secretariat, and the World Bank, September 1998).

(3) These studies are published under the auspices of the United Nations Statistical Agencies, the University of Pennsylvania, Eurostat, and the OECD. See Irving Kravis and Milton Gilbert An International comparison of National Products and the Purchasing Power Currencies (Organization for European Economic Cooperation, Paris, 1954).

(4) Gustav Cassell, “Abnormal Deviations in International Exchanges,” Economic Journal, December 1918, 413-15.

(5) Catherine Mann, “Price, Profits, Profit Margains and Exchange rates, “Federal Reserve Bulletin, 1986, pp. 366-79.

Michelle A. Vachris is an associate professor of economics at Christopher Newport University and James Thomas Is a senior economist In the Office of Prices and Living Conditions, Bureau of Labor Statistics.

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