Explanatory Memorandum to COM(2006)135 - Common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2006)135 - Common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination. |
|---|---|
| source | COM(2006)135  |
| date | 22-03-2006 |
PPPs are currency conversion rates that convert economic indicators expressed in national currencies to a common currency and, at the same time, take account of price level differences and thus allow pure volume comparisons of Gross Domestic Product (GDP) and its aggregates between countries.
The purpose of a PPP Regulation would be to codify what is already being done by the European Union (EU) Member States and Eurostat to calculate annual PPPs, and hence to give the work a statutory basis. It would not of itself call for any new work to be done, except to introduce new elements of quality control; nor would it seek to encompass other matters, such as price comparisons in general.
The Structural Funds Regulation, Council Regulation (EC) No 1260/1999, gives statutory responsibility to the Commission for calculating GDP on a purchasing power basis. A new legal act in this domain provides the opportunity to clarify the role and responsibilities of national authorities in compiling these statistics and transmitting them to Eurostat.
The setting-up of a legal basis for PPPs should improve the transparency, timeliness and quality of the entire process of PPP production, both within the national statistical institutes (NSIs) and in Eurostat. The use of a Regulation as a means of improving PPP quality overall may be seen as a target not only for Eurostat as producer of the co-ordinated results, but also for the countries themselves.
Contents
GDP, which is one of the vital national accounts aggregates, represents in a concise form the results of all activities of economic operators within a given economic territory and within a given period, usually a year. GDP is calculated in accordance with a system of national accounts which, for the EU, is the European system of integrated economic accounts 1995 (ESA-95). GDP and its aggregates are essential indicators for macroeconomic analysis and economic policy. GDP can be measured from the production, the expenditure and the income side. For PPP purposes the expenditure measure is particularly important. It reveals the extent to which the goods and services produced (or imported) by the economy of a country are used for private consumption, public consumption, capital formation or export.
International comparisons of economic aggregates such as GDP require firstly that the basis for measuring the aggregates is consistent for the countries under comparison, and secondly that a comparable unit of measurement is employed. Consistency in the basis for measuring the aggregates is achieved through compliance with ESA95.
The differences in GDP expenditure values between countries correspond not only to a “volume of goods and services” component but also to a “level of prices” component, which can sometimes assume sizeable proportions (value is the product of price and volume). In order to obtain a real comparison of volumes, therefore, it is essential to use conversion factors (spatial deflators) which reflect the differences in the level of prices between countries.
The use of exchange rates as conversion factors does not allow such a real comparison of the volumes of goods and services produced and used in the different countries. This is because exchange rates are determined by the many factors which affect demand and supply for currencies, such as international trade and interest rate differentials. In other words, exchange rates usually reflect elements other than price differences alone.
PPPs between various countries’ currencies have been specifically developed to be appropriate for use as spatial conversion factors.
PPPs are currency conversion rates that convert economic indicators, expressed in nominal national currencies, to a common artificial currency called Purchasing Power Standard (PPS), which equalises the purchasing power of different national currencies and thus allows meaningful pure volume comparison of GDP and its aggregates between countries. In other words, PPPs are both price deflators and currency converters; they remove the differences in price levels between countries in the process of conversion.
Economic volume aggregates in PPS are obtained by dividing their original value in national currency units by the respective PPP. 1 PPS buys the same given volume of goods and services in all countries, whereas different amounts of national currency units are needed to buy the same volume of goods and services in individual countries, depending on the national price level. Thus, GDPs of countries expressed in PPS by using PPPs as conversion factors reflect a pure volume comparison, since the price level component has been eliminated.
With the launch of the euro in the euro-zone Member States, for the first time prices can be compared directly between those countries. However, the euro has different purchasing power in the individual euro-zone countries, depending on the national price levels. Therefore, in order to determine pure volume aggregates in PPS it is still necessary to calculate PPPs. In other words, for the non-euro-zone countries PPPs are currency converters and eliminate the effects of different price levels, while for the euro-zone countries they fulfil only the latter, price-deflator function.
In an annual multilateral exercise, PPPs are obtained as the averages of the price ratios between the different countries for a basket of comparable goods and services. These are selected to represent an entire set of well-defined expenditure classifications, and to be representative of consumption patterns in the various countries.
The reform of the Structural Funds, and their extension to new Member States, has been embodied in Council Regulation (EC) No 1260/1999 and in Annex II to the 2003 Act of Accession, of which Section 15 is entitled “Regional Policy and coordination of structural instruments”. The first of these lays down general provisions on the Structural Funds for the current period, stating that regions whose per capita GDP measured in PPPs is less than 75% of the Community average are eligible for Structural Funds allocations. It also says that the criteria are to be calculated using objective statistical data. It may be assumed that similar provisions would govern the following period, beginning in 2007. The second of these acts amends those principles to cover new Member States too.
This new legal basis contrasts with the previous situation, in which the only statutory reference to PPPs in relation to the Structural Funds was in the recital of Council Regulation (EEC) No 2052/88, which simply stated: “Whereas [. . .] this list should comprise administrative level NUTS II regions where per capita GDP measured in terms of purchasing power parity is less than 75% of the Community average, . . . ”. There was no implementing clause in the body of the Regulation. Currently, the Structural Funds requirements are met by combining regional GDP values and national PPPs.
The Regulation establishing a Cohesion Fund (Council Regulation (EC) No 1164/94 of 25 May 1994) states that it is the Community’s task to promote economic and social cohesion and solidarity between the Member States, and Cohesion Fund is an instrument to accomplish this. Article 2 i of the Regulation states that: “the Fund shall provide financial contributions to projects, which contribute to achieving the objectives laid down in the Treaty on European Union, in the fields of environment and trans-European infrastructure networks in Member States with a per capita gross national product (GNP), measured in purchasing power parity, of less than 90% of the Community average.” Therefore, the Cohesion Fund Regulation, too, gives to the Commission the statutory responsibility for calculating purchasing power parities.
Although the Regulation focuses on the specific aim of obtaining price data for making international GDP comparisons, it is also a means of establishing a statutory basis for the price collection activity which is necessary in order to fulfil a large part of the Commission's legal requirements in connection with Article 64 of the Staff Regulations. In other words, the prices collected in the realm of the PPP exercise are also used for establishing the correction coefficients to be applied to the remuneration and pensions of officials and other servants of the European Communities in accordance with the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Communities. Article 1 of Annex XI of the Staff Regulations requires that “the economic parities shall be calculated in such a way that each basic component can be checked by a direct survey at least once every five years”.
There is a growing need within the Commission for data concerning spatial price comparisons – particularly for consumer prices. This requirement is prompted by a number of policy needs, in particular the monitoring of price convergence in the Single Market, the improvement of price indicators to monitor the functioning of public procurement markets and the monitoring of price convergence in the euro-zone since the introduction of the euro. Price level indices at the level of overall private household consumption, coming from the PPP exercise, already feature as Structural Indicators in the Commission’s Communication on Structural Indicators and Commission’s annual Synthesis Report to the European Council.
From the point of view of consumer protection, there is also a need to monitor price differences for a wide range of consumer products across the EU. A substantial part of these requirements, particularly at more aggregated level, can be met as a by-product of the wider PPP programme.
Thus, price comparisons are of special importance for several Community policies, such as development of the single market and monitoring of the EMU with regard to convergence of prices and consumer protection concerning the identification of price differences. The PPP work programme, as outlined in this proposed Regulation, would not necessarily provide all the data required for these other uses, but it would at least put in place a framework which could be used as a basis for additional price comparison work. Moreover, nothing in this Regulation prevents the Commission from investigating and studying new alternative sources of price data. These kinds of studies are currently being undertaken in the Commission to investigate the appropriateness of bar-code scanner data and the Internet as a source for international price comparisons.
Economic aggregates converted into a common currency using PPPs have a wide range of uses in the Commission. PPPs are economically and politically vital indicators for the EU.
The Commission has a statutory responsibility for calculating GDP on a purchasing power basis; however, the Member States currently have no legal obligation to co-operate. Given that the very nature of this work is multilateral, if only one country withdrew its support the validity of the whole exercise would be impaired. It is therefore important to provide a stable, binding and reliable legal framework capable of ensuring the timely availability of these data.