Rates of conversion

To compare a single country’s real GDP over a period of years, it is necessary to remove movements that are due to price changes. In the same way, in order to compare the real GDPs of a group of countries at a single point in time, it is necessary to remove any differences in their GDPs that are due to differences in their price levels. Price indices are used to remove the effects of price changes in a single country over time; purchasing power parities (PPPs) are used to remove the effects of the different levels of prices within a group of countries at a point in time.

Market exchange rates are sometimes used to convert national GDPs into a common currency. However, comparisons of GDP based on exchange rates do not reflect well the real volumes of goods and services in the different countries. For many of the low-income countries, for example, the differences between GDP converted using market exchange rates and GDP converted using PPPs are considerable. In general, the use of market exchange rates understates the real GDP of low-income countries and overstates the real GDP of high-income countries.

Definition

PPPs are currency converters that equalise price levels between countries. PPPs have been calculated by comparing the prices in OECD countries of a common basket of about 2 500 goods and services. Countries are not required to price all the items in the common basket because some of the items may be hard to find in certain countries. However, the common basket has been drawn up in such a way that each country can collect prices for a wide range of the goods and services that are representative of their markets.

The goods and services to be priced cover all those that enter into final expenditure: household consumption, government services, capital formation and net exports. Prices for the different items are weighted by their shares in total final expenditure to obtain the PPPs for GDP shown here.

Comparative price level indices are the ratios of PPPs to market exchange rates. At the level of GDP they provide a measure of the differences in the general price levels of countries.

Comparability

PPPs for the OECD and Russia have been calculated jointly by the OECD and Eurostat using standard procedures. In consultation with their member countries, OECD and Eurostat keep their methodology under review and improvements are made regularly. PPPs for non-OECD countries, with the exception of Russia, are calculated within the framework of the International Comparison Programme (ICP). There are six regions in the ICP programme, of which five – Africa, Asia-Pacific, the Commonwealth of Independent States (CIS), Latin America and Caribbean and Western Asia – are regions overseen by the ICP Global Office at the World Bank.

Overview

Over the period 2002-14, there were significant differences between changes in PPPs and changes in market exchange rates; even when the two indicators moved in the same direction, changes differed in their magnitude.

Price level indices are PPPs estimates for 2014 divided by market exchange rates for the same year, with the OECD set equal to 100. In general, there is a positive correlation between GDP levels and price levels. Australia, Norway and Switzerland, three OECD countries with high per capita income, also recorded the highest price levels in 2014, exceeding the average OECD level by 40% or more, while India had price levels of around 30% of the OECD average. Changes in price level indices should however be interpreted with caution as they are highly dependent on changes in exchange rates.

Sources

Further information

Analytical publications

Online databases

Statistical publications

Websites

Table. Purchasing power parities and indices of price levels

 http://dx.doi.org/10.1787/888933336563

Indices of price levels
OECD = 100, 2014
picture

 http://dx.doi.org/10.1787/888933335476