EUROPEAN COMPARISON PROGRAMME
Methodological notes 2009

I. Character of the European Comparison Programme (ECP)

The scope of this programme covers a work area in the current Statistical Programme of the European Commission “Measuring differences in the price levels of goods and services between countries and between specific places”,

This is put into practice by establishing Purchasing Power Parities (PPPs) used to compare relative price levels and the overall economic development of European countries measured by per capita GDP after eliminating the price impact. The PPPs are specific convertors of economic value indicators from national currency into unic numeraire called purchasing power standard (PPS), that equilise the purchasing power of different national currencies.

Principal legal bases for this work consist of the REGULATION (EC) No 1445/2007 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 December 2007 establishing common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination, as well as the Council Regulations on the Structural Funds (Reg. 1260/99, 1267/99) and the EC Staff Regulations (Reg. 3830/91). The tasks contain regular comperable data production in order to establish volume deflators for GDP as a part of the Structural Funds allocation process.

The aim of the European Comparison Programme (ECP) is annual comparisons, between partners' countries, of the following indicators:

1. Purchasing power Parities (PPPs)

2. Price levels.

3. Volume measures of the main National Accounts aggregates: Gross Domestic Product (GDP) by final use and its main components

One of the particularly important uses of PPPs for the European Commission is to establish both the list of regions that could benefit from the EU Structural Funds as well as the amount of funds to be allocated to each region. The aim of the Structural Funds is to gradually reduce economic disparities between and within EU Member States.

The differences in values of GDP expenditure components, even when revaluated in a common currency using official exchange rates, reflect not only the differences in the volume of goods and services finally consumed, but also the differences in price levels between the countries. Moreover the official exchange rates, except price differences alone, reflect the supply and demand on the currency markets as well. Therefore, the use of exchange rates as conversion factor in international comparisons is not advisible. In other words, exchange rates show how much euro/dollars etc. the national currency buys at a given moment.

To obtain a pure comparison of volumes for the ECP purposes, it is, therefore, essential to use specific conversion rates (spatial deflators), which remove the effect of price level differences between countries and show how much national money one has to spend to buy a well defined basket of comparable and representative goods and services. Purchasing Power Parities (PPP) are such currency conversion rates, which measure the ratio of the prices in national currency of the same good or service in different countries. They are applied to convert the value indicators to an artificial common currency unit called Purchasing Power Standard (PPS), which equalize the purchasing power of different national currencies.

PPPs are calculated on the basis of real prices of selected representative goods and services (consumer and equipment goods) and standard construction projects. For the price collection, an international basket of comparable goods (for individual consumption and investment) and services is used. For selecting goods and services two main principles should be observed:

1. to be representative of the whole range of consumer goods and services consumed by households and of investments goods used for fixed capital formation as well;

2. to be representative of consumption patterns in the various countries participants in ECP.

II. Main definitions

Purchasing Power Parities (PPPs)are rates of currency conversion that convert value indicators from national into a common currency. The expenditures on GDP for different countries converted into a common currency by means of PPPs are comparable and reflect only differences in the volume of goods and services purchased. The original PPPs are expressed in a standardized form to the base (EU-27 = 1), so called Purchasing Power Standard (PPS) i.e. EUR in real terms (artificial 'average' currency).

Price level indices (comparative price levels) provide a measure of the differences in price levels between countries by indicating for a given GDP component the number of units of the common currency needed to buy the same volume of goods and services in each country compared with the base EU-27. The price level indices are calculated as a ratio between PPPs and the respective exchange rates (national currency/EUR) for each country, in relation to the EU average.

The GDP at current prices converted to a common currency using PPPs is called real GDP (GDP in real terms).

Per capita GDP in real terms (in PPS) is generally accepted as a quantification of the overall economic performance of countries compared with EU-27 or with other partner countries via EU-27.

Volume indices of per capita real GDP reflect only differences between partner countries in the volume of goods and services finally consumed i.e. the impact of the national prices of each country is eliminated. They are calculated by dividing the national final GDP expenditure, converted into a common currency by means of PPS, by the EU-27 average real final GDP expenditure. These indices are not intended to rank countries strictly. It is preferable to use them for dividing countries into groups of a comparable level of per capita real GDP.

Final consumption expenditure of households and non-profit institutions serving households (NPISHs) consists of expenditure incurred by households and by NPISHs on consumption goods and services.

Actual final consumption consists of final consumption expenditure of households and that of NPISHs plus individual consumption goods and services provided by general government free or at prices that are not economically significant e.g. in the field of education, health care.

For analytical purposes the most recommended applications of recalculated and extrapolated data are the comparisons of indicators across countries at a given point of time. The over time analysis and comments for a given country should be avoided.

The partner countries in ECP may publish the comparison results only after their official release by Eurostat, OECD or United Nations Statistical Commission.

III. Organization of the price surveys of goods and services representatives

Consumer goods and services

The price surveys of goods and services consumed by households are needed for PPPs calculation by means of which the indicators are recalculated into a common currency so called PPS and annual volume comparisons of GDP by final use and its components is carried out.

For the purpose of the collection of consumer prices, the countries participating in the group co-ordinated by Eurostat are divided into 4 sub-groups:

The idea behind this approach is to group countries which have similar market structure and consumption pattern due to their similar geographical location. Consequently, each group of countries has group-specific product lists. Another reason for the group structure was to integrate the consumer price surveys for Member States and EU Candidate Countries. Specific meetings in all three groups and one so-called "overlap" meeting are organised in order to ensure:

The goods/services representatives included in the product lists are very well defined with relevant physical characteristics; in many cases specific brands and models are determined in advance. The group leaders co-ordinate the compilation of the group product lists, including pre-survey (survey regarding the goods available on the domestic market of each country - brands, models, characteristics) and validate the prices collected in their respective group. Eurostat is responsible for overall European comparison and PPP calculation.

The consumer price surveys are organised in a rolling cycle over three years. About one third of the consumer goods and services is surveyed every year and for the remaining two thirds, suitable consumer price indices (CPI) are used for extrapolation of prices which have been collected one and two years ago. Annually two surveys are carried out - in spring and in autumn. Each survey refers to a certain group goods/services: "Food, beverages and tobacco", “Personal appearance”, "In the house", "Services", "Health and Furniture", "Transportation, hotels and restaurants". The re-classification of goods and services which has been made due to the shift from the old Classification of households goods and services (CHGS) to the new Classification of individual consumption by purpose (COICOP) contributes to the improvement of work. The price surveys are carried out in the countries' capital cities in a specific survey months. The prices observed are the market prices that consumers actually paid. The only exception is the group of pharmaceutical products where the price to be collected is the full price (price actually paid by the consumer plus subsidies by public institutions). Subsequently, the collected prices are adjusted to annual average prices, using monthly consumer price indices (CPI) of the survey year and to national average prices, using spatial adjustment factors. Between survey years, benchmark results are extrapolated/retrapolated using national CPI/ harmonized CPI and the GDP deflator from National Accounts data. For example, the calculation of PPPs for the consumer goods and services for the whole 2000 are based on: extrapolated data from E99-1 and E99-2, actual data from E00-1 and E00-2 and retrapolated data from E01-1, E01-1 and E01-3.

Equipment goods and construction projects

For calculation of PPP needed to convert the GDP component "Gross fixed capital formation" into a common currency specialized price surveys of equipment goods and construction are carried out. They are undertaken by specialized teams of experts in the field of equipment goods and construction.

For the equipment goods one common, for all 37 participating countries, list of machinery representatives is compiled. Different types of machinery broken down by basic heading according their function are included in the list. For example, agricultural machinery, machine tools, machinery for construction, machinery for apparel production, office machinery, electric machinery and apparatus, transport equipment, software etc. Machinery is precisely defined by makes, models, technical characteristics.

The price survey of selected machinery representatives is conducted every second year in a specific survey month.

The approach for compilation of the list of construction projects representatives is quite different. Construction practices, norms and tastes vary a lot from country to country, mainly due to different geographical characteristics such as climates. Construction projects, which are typical and thus representative in one country (for example, a Nordic house) may not be available in other countries (for example, a Mediterranean island) and anyway are not representative there. Therefore, in contrast to consumer goods, the price collection cannot be based on real completed construction projects sold in all markets.

To achieve both representativity and comparability at the same time, the prices are collected for fictitious standard construction projects. Nevertheless these standard construction projects are based on real construction methods and practices applied in the countries and their components can be found in real construction projects. The list includes different types standard construction projects in the field of residential, non-residential and civil engineering construction and it is uniform for all 37 countries participating in ECP.

A standard construction project consists of number major components such as earthworks, concrete, masonry, roofing etc. Each major components comprises a number of elementary components such as excavation of foundations, transportation of soil., compacting of sand in trenches etc. For the price collection, the major and elementary components are detailed in bills of quantities.

The survey of construction prices is conducted every second year in a specific survey month

IV. Presentation of the results

Eurostat is able to provide fully comparable results for the 37 countries participating in the ECP only after full 3-years survey cycle is finished.

1.Scaling the basic heading level parities to EURO

The final data of the survey represent parities calculated using a matrix according to the EKS (Elteto-Koves-Szulc) method of multilateral aggregation between the parities of all 37 participant countries at the basic heading level. With the EKS method, countries are treated as a set of independent units and each country is assigned an equal weight. These parities are then standardized and scaled to the geometric mean of the exchange rates to the EURO of the participant countries. This scaling has no impact on the relativities between countries.

2. Aggregated results

The aggregated results are obtained by the usual method for calculation of binary parities using the Laspeyres/Paasche/Fisher formula. In order to derive parities that are transitive i.e. the parity of a given country to be directly comparable with the parity of each other country participating in the comparison EKS procedure is applied.

In line with the agreed policy EU-27 is chosen to be a base i.e. EU-27 = 100.

The parities at aggregate level are scaled in such a way that the sum of GDP in EURO of the 27 EU Member States equals its value in purchasing power standard (∑ GDP for ĹU-17 in EURO = ∑ GDP for EU-27 in PPS).

The calculated parities at aggregate level, together with the market exchange rate, the corresponding GDP expenditure values in national currency and the estimates of total population are presented in standard tables, so called "ICP" format - i.e. ESA'95 concept of actual individual consumption.

Last updated on 30.01.2009

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