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Methodologies and
W o r k i n g p a p e r s
Eurostat-OECD Methodological Manual on
Purchasing Power Parities
2nd Edition
2012 edition
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Luxembourg: Publications Office of the European Union, 2012

ISBN 978-92-79-25983-8
ISSN 1977-0375
doi:10.2785/33942
Cat. No KS-RA-12-023-EN-N

Theme: Economy and finance
Collection: Methodologies & Working papers

© European Union / OECD, 2012
Reproduction is authorised provided the source is acknowledged.

Contact for requests for translation: [email protected] or [email protected]

Also available under the title Eurostat-OECD Methodological Manual on Purchasing Power Parities, OECD,
ISBN 978-92-64-18923-2

The opinions expressed and arguments employed herein do not necessarily reflect the official views of the
Organisation for Economic Co-operation and Development (OECD) or of the governments of its member
countries or those of Eurostat or the European Commission.
Foreword

For the last three decades, Eurostat and OECD have worked together in producing and publishing
Purchasing Power Parities (PPPs) for their respective member countries. PPPs are essential tools
for the comparison of price and volume levels of GDP and other indicators. The common programme
is called the "Eurostat-OECD PPP Programme".
The full methodology underlying the Programme is described in this second edition of the Eurostat-
OECD Methodological Manual on Purchasing Power Parities. It updates and replaces the first edition
of the manual that was published in 2006. The manual describes the organisation of the work and
the data collection, validation and calculation methods as applied for the reference year 2011.
Finally, the manual looks ahead at future developments in key areas such as health services and the
further integration of PPP and CPI data collection.
The manual has three specific objectives: first, to provide essential methodological guidelines on the
international price and volume comparisons of GDP to those directly engaged in the Programme, i.e.
to practitioners in Eurostat, the OECD and National Statistical Institutes (NSIs) of participating
countries; second, to communicate effectively on the objectives and outcomes of the Programme to
key users – politicians, journalists, academics, researchers – and importantly, to advise these users
on the use and interpretation of comparison results; and third, to provide a single point of reference
on the Eurostat-OECD PPP Programme, accessible to teachers, students and the general public
interested in PPPs and related statistics.
In addition to the methodological advances made, we are pleased that the earlier problems of
incomplete country coverage and timeliness, which were considered as impediments to the wider
use of PPPs have now by and large been addressed. Eurostat and OECD co-operate with the World
Bank in the revitalized International Comparison Programme, to produce global PPP data. In 2008, a
world comparison was published for 2005 for 147 countries, while at the end of 2013 the results of a
world comparison for 2011 covering some 180 countries are to be released.
We trust that this edition of the Eurostat-OECD Methodological Manual on Purchasing Power Parities
will foster a better understanding and greater use of PPPs in international price and volume
comparisons of GDP.

Walter Radermacher Martine Durand
Chief Statistician of the EU and OECD Chief Statistician and
Director General of Eurostat Director of Statistics

Eurostat-OECD Methodological Manual on Purchasing Power Parities 3
Acknowledgements

This edition of the Eurostat-OECD PPP methodological manual is the product of the Task Force set
up by Eurostat to oversee the revision and updating of the 2005 edition of the manual that was
published in 2006.
The Task Force was established in the fourth quarter of 2010. It was chaired by Paul Konijn
(Eurostat) and its principal members were Scott Johnson (United Kingdom), Harri Kananoja
(Finland), Francette Koechlin (OECD), José Mouronho (Portugal), Fabrice Romans (France), Sergey
Sergeev (Austria) and David Roberts (editor).
The Task Force met five times between November 2010 and February 2012: Eurostat (12 November
2010), OECD (4-5 April 2011), Eurostat (27-28 June 2011), OECD (17-18 October 2011) and
Eurostat (13-14 February 2012).
Countries participating in the Programme received preliminary versions of individual chapters and
annexes between July 2011 and July 2012 and were invited to comment on them either on the wiki
designed for the purpose, at the meetings of the Eurostat PPP Working Group or by email. Countries
were presented with a complete version of the manual in September 2012 with a request for further
comments.
The manual was drafted by David Roberts with contributions from Paul Konijn. Eurostat funded the
editor and the Task Force.
Eurostat and OECD would like to thank all people that contributed by providing comments and
suggestions for the improvement of this manual.

Eurostat-OECD Methodological Manual on Purchasing Power Parities 4
Contents
Table of contents
Foreword ......................................................................................................................................... 3
Acknowledgements ........................................................................................................................ 4
Table of contents ............................................................................................................................ 5
Overview ........................................................................................................................................... 11
What does the Eurostat-OECD PPP Programme do? ................................................................... 13
Why is GDP compared from the expenditure side? ....................................................................... 13
What are PPPs? ............................................................................................................................. 13
What are PPPs used for? ............................................................................................................... 14
What are the price and volume indices that PPPs generate? ........................................................ 14
Why not to use exchange rates to make international comparisons of GDP? ............................... 15
Are PPPs necessary if countries share a common currency? ....................................................... 15
Can PPPs be used to determine whether a currency is undervalued or overvalued? ................... 16
Should PPPs always be used to make international comparisons? ............................................... 16
How are PPPs calculated? ............................................................................................................. 16
What products are used to calculate PPPs? .................................................................................. 16
What prices are used to calculate PPPs? ...................................................................................... 17
In what circumstances could PPPs be biased? .............................................................................. 17
What has to be considered when comparing PPP-derived data over time? .................................. 18
Who is responsible for calculating PPPs and for the quality and accuracy of PPP results? .......... 18
How often are comparisons made and the results updated? ......................................................... 19
What are purchasing power standards (PPS) and OECD dollars? ................................................ 19
What data are published? .............................................................................................................. 20
Which measure to use to compare material well-being? ................................................................ 20
How to get access to more data? ................................................................................................... 21
Chapter 1: Purpose of the Eurostat-OECD PPP Programme ...................................................... 23
1.1 Introduction ......................................................................................................................... 25
1.2 General approach ............................................................................................................... 25
1.2.1 Gross domestic product (GDP) ................................................................................... 25
1.2.2 Eurostat-OECD approach ............................................................................................ 26
1.3 Exchange rates and PPPs .................................................................................................. 28
1.3.1 Exchange rates ............................................................................................................ 28
1.3.2 Purchasing power parities (PPPs) ............................................................................... 30
1.3.3 Price, volume and value measures ............................................................................. 32
1.4 Using PPPs ......................................................................................................................... 34
1.4.1 Uses and users of PPPs .............................................................................................. 34
1.4.2 Points to remember when using PPPs ........................................................................ 35

Eurostat-OECD Methodological Manual on Purchasing Power Parities 5
Contents
Chapter 2: Data requirements ......................................................................................................... 39
2.1 Introduction ......................................................................................................................... 41
2.2 Consistency with national accounts .................................................................................... 42
2.3 Comparability and representativity ...................................................................................... 43
2.3.1 Comparability ............................................................................................................... 44
2.3.2 Representativity ........................................................................................................... 45
2.3.3 Equi-representativity .................................................................................................... 46
2.4 Actual data requirements .................................................................................................... 47
Chapter 3: Organisation .................................................................................................................. 51
3.1 Introduction ......................................................................................................................... 53
3.2 Institutional framework ........................................................................................................ 53
3.2.1 PPP Regulation ........................................................................................................... 53
3.2.2 Responsibilities ............................................................................................................ 54
3.2.3 Quality control and compliance monitoring .................................................................. 55
3.3 Survey organisation ............................................................................................................ 56
3.3.1 Schedule of surveys .................................................................................................... 56
3.3.2 The 2011 comparison .................................................................................................. 59
3.3.3 Organisation of groups ................................................................................................ 60
3.3.4 Integrated information technology system ................................................................... 61
Chapter 4: Component expenditures of GDP ................................................................................ 63
4.1 Introduction ......................................................................................................................... 65
4.2 The expenditure approach to GDP ..................................................................................... 65
4.2.1 Actual and imputed expenditures ................................................................................ 66
4.2.2 Individual and collective consumption expenditures .................................................... 67
4.2.3 Actual individual and collective consumption .............................................................. 69
4.2.4 Market and non-market services ................................................................................. 70
4.2.5 Gross capital formation ................................................................................................ 71
4.3 The expenditure classification ............................................................................................. 72
4.3.1 Structure of the classification ....................................................................................... 72
4.3.2 Basic headings ............................................................................................................ 74
4.3.3 Derivation of actual individual consumption ................................................................ 75
4.3.4 Main aggregates .......................................................................................................... 76
4.3.5 Presentation of the classification ................................................................................. 79
4.3.6 Correspondence with COICOP, COPNI, COFOG 98 and CPA 96 ............................. 80
4.3.7 Classification by type of product .................................................................................. 80
4.4 Reporting and validation of expenditure data...................................................................... 81
4.4.1 Reporting ..................................................................................................................... 81
4.4.2 Validation ..................................................................................................................... 82
4.5 Future developments .......................................................................................................... 84
4.5.1 SNA 2008 and ESA 2010 ............................................................................................ 85
4.5.2 Harmonisation of COICOP .......................................................................................... 86
4.5.3 CPA 2008 .................................................................................................................... 86
Chapter 5: Consumer goods and services .................................................................................... 87
5.1 Introduction ......................................................................................................................... 89
5.2 Survey process ................................................................................................................... 89
5.3 Preview and planning .......................................................................................................... 95

Eurostat-OECD Methodological Manual on Purchasing Power Parities 6
Contents
5.4 Pre-survey and product list creation.................................................................................... 96
5.4.1 Requirements for product lists ..................................................................................... 96
5.4.2 Pre-survey ................................................................................................................... 98
5.4.3 Establishment of the final product list .......................................................................... 99
5.4.4 Structured product descriptions ................................................................................. 101
5.4.5 Product specifications ................................................................................................ 103
5.5 Price collection and intra-country validation ...................................................................... 108
5.5.1 Prices to be collected ................................................................................................ 109
5.5.2 Selection of outlets .................................................................................................... 110
5.5.3 Number of products to be priced per basic heading .................................................. 113
5.5.4 Number of price observations per product ................................................................ 114
5.5.5 Assigning representativity indicators ......................................................................... 115
5.5.6 Intra-country validation .............................................................................................. 117
5.5.7 Survey report ............................................................................................................. 122
5.6 Inter-country validation ...................................................................................................... 122
5.6.1 Validation of prices .................................................................................................... 122
5.6.2 Validation of representativity indicators ..................................................................... 125
5.6.3 Comparison of results across surveys ....................................................................... 126
5.7 Evaluation ......................................................................................................................... 127
5.8 Derivation of national annual prices .................................................................................. 127
5.8.1 Survey prices to national prices ................................................................................. 127
5.8.2 National prices to annual national prices ................................................................... 129
5.8.3 Seasonal products ..................................................................................................... 129
5.9 Estimation of PPPs for non-survey years .......................................................................... 132
5.10 Synergies between PPP and CPI price collection ............................................................. 132
Chapter 6: Housing ........................................................................................................................ 135
6.1 Introduction ....................................................................................................................... 137
6.2 Actual and imputed rents .................................................................................................. 137
6.3 Rent survey ....................................................................................................................... 141
6.3.1 Price approach reporting form ................................................................................... 142
6.3.2 Quantity approach reporting form .............................................................................. 145
6.4 Calculating PPPs for housing............................................................................................ 146
6.4.1 Directly by the price approach ................................................................................... 146
6.4.2 Indirectly by the quantity approach ............................................................................ 147
6.4.3 Linking the direct and indirect PPPs .......................................................................... 148
6.5 Validation of housing data ................................................................................................. 150
Chapter 7: Health ........................................................................................................................... 151
7.1 Introduction ....................................................................................................................... 153
7.2 Classification of health expenditures................................................................................. 153
7.3 Price collection: purchases from market producers .......................................................... 155
7.3.1 Full market price ........................................................................................................ 155
7.3.2 Pharmaceuticals and other medical products ............................................................ 156
7.3.3 Out-patient health services ........................................................................................ 156
7.4 Price collection: government-produced health services .................................................... 157
7.5 Hospital services ............................................................................................................... 158

Eurostat-OECD Methodological Manual on Purchasing Power Parities 7
Contents
7.6 Towards an output based approach.................................................................................. 160
7.6.1 Defining output .......................................................................................................... 160
7.6.2 Case types ................................................................................................................. 161
7.6.3 Quasi prices ............................................................................................................... 163
7.6.4 Weights ...................................................................................................................... 164
7.6.5 PPPs for actual individual consumption of health ...................................................... 164
Chapter 8: Education ..................................................................................................................... 167
8.1 Introduction ....................................................................................................................... 169
8.2 The output method ............................................................................................................ 169
8.3 Data sources ..................................................................................................................... 171
8.4 Quality adjustment factors ................................................................................................. 173
8.5 Calculating PPPs for education ......................................................................................... 176
8.6 Validation of education data .............................................................................................. 179
Chapter 9: Collective services ...................................................................................................... 181
9.1 Introduction ....................................................................................................................... 183
9.2 Collective services ............................................................................................................ 183
9.3 Input-price approach ......................................................................................................... 185
9.4 Survey of compensation of government employees ......................................................... 186
9.5 Productivity differences ..................................................................................................... 192
Chapter 10: Equipment goods ...................................................................................................... 195
10.1 Introduction ....................................................................................................................... 197
10.2 General approach ............................................................................................................. 197
10.3 Survey process ................................................................................................................. 199
10.4 Pre-survey and item list creation ....................................................................................... 199
10.4.1 Products, items and SPDs ......................................................................................... 199
10.4.2 Item specifications ..................................................................................................... 201
10.4.3 Representativity ......................................................................................................... 201
10.4.4 Pre-survey ................................................................................................................. 204
10.5 Price collection .................................................................................................................. 204
10.5.1 Equivalent items ........................................................................................................ 204
10.5.2 Number of products and items to be priced ............................................................... 205
10.5.3 Sources of prices ....................................................................................................... 207
10.5.4 Cars and motor cycles ............................................................................................... 207
10.6 Reporting prices ................................................................................................................ 208
10.6.1 Reporting items and their prices ................................................................................ 208
10.6.2 Survey report ............................................................................................................. 209
10.7 Validation of prices ............................................................................................................ 210
10.7.1 Intra-country validation .............................................................................................. 210
10.7.2 Inter-country validation .............................................................................................. 210
10.8 Adjustment for non-deductible VAT .................................................................................. 212
10.9 Estimation of PPPs for equipment goods in non-survey years ......................................... 213

Eurostat-OECD Methodological Manual on Purchasing Power Parities 8