Abstract
The integration and comparison between the Consumer Price Indices (CPIs) and the Purchasing Power Parities (PPPs) has been widely discussed in literature and the need of a more integrated approach for calculating these indices has been emphasized. The paper focuses on these issues, both from a theoretical and practical point of view, suggesting the use of a broader definition of the comparability of products for the PPP calculation and a simple statistical method for investigating the advantages of broadening the definition of comparability to include additional products in the PPP calculation.
Concerning the comparisons between CPIs and PPPs, the paper illustrates price index decomposition methods in order to measure the factors (essentially due to the evolution of prices and to the share of consumption expenditure concerning the different products and services) which explain the divergences between the CPIs of two countries from time t−1 to time t, and the variations over the same period of the PPPs concerning these countries calculated at time t−1 and time t. However, it is clear that for achieving the integration of PPP computation with CPI activities an increased amount of information should be collected and processed at least in a benchmark year. Therefore, is necessary to carry out more research on these topics at an international level in order to agree on a broader definition of comparability of products for the computation of the PPPs by using the analyses that we have suggested in this paper.
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Notes
- 1.
- 2.
When a characteristic is price determining the absence or presence of that characteristic will affect the price that consumers are prepared to pay for the product. There are several examples of price determining characteristics (Word Bank, ICP handbook, 2007). For example, the possession, or absence, of air conditioning will usually affect the price of an automobile. Consumers in most countries will pay more to obtain it. The size of a packet of rice is price determining as consumers will pay more for a kilo than half a kilo.
- 3.
As far as some useful initiatives that could provide a framework for a practical integrated approach for the integration of PPP and CPI work are concerned we refer to the suggestions of other mentioned authors and, in particular, to the ILO manual which mentions two core strategies to do it: the “Use of characteristics approach” and “linking approach to international comparisons”.
- 4.
These issues are currently being researched, and Rao (2001b) offer a modified approach that attached weights proportional to coverage and representativeness.
- 5.
For the international comparisons the integration work also requires the harmonisation of the definitions and classifications of products and of the methods for the collection of data.
- 6.
If this hypothesis is not satisfied the results of the decomposition are approximate.
- 7.
We must underline that by applying similar procedures and considering area j as reference area, after some simple algebra, we can obtain four different forms of the decomposition of the CPI differences, that give two estimations of the effects which differ slightly (see Biggeri et al. 2008). In actual fact a unique measure of the difference could be achieved but it is irrelevant to the aim of this paper so we will leave this issue for further development.
- 8.
Once again by applying similar procedure we can obtain similar decomposition forms by changing the reference country. However the results may differ slightly.
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Biggeri, L., Laureti, T. (2010). Are Integration and Comparison Between CPIs and PPPs Feasible?. In: Biggeri, L., Ferrari, G. (eds) Price Indexes in Time and Space. Contributions to Statistics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2140-6_1
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