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Interpretation of PPPs: Measuring Factors Affecting Comparisons

This paper explores the challenges in interpreting Purchasing Power Parities (PPPs) and suggests a method to measure the factors that affect comparisons of consumer price levels. The aim is to improve the comparability and representativeness of PPPs, particularly at the regional level.

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Interpretation of PPPs: Measuring Factors Affecting Comparisons

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  1. Joint UNECE/ILO Meeting on Consumer Price Indices The interpretation of the PPPs: a method for measuring the factors that affect the comparisons and the integration with the CPI work at regional level Luigi Biggeri1 , Rita De Carli2 and Tiziana Laureti31Istat and University of Firenze, Italy; 2Istat, Italy; 3University of Tuscia, Italy Geneva, 8-9 May 2008

  2. Joint UNECE/ILO Meeting on Consumer Price Indices Structure of the paper • Introduction • Difficulties in interpreting PPPs: comparability and representativeness • A method for measuring the factors that affect the comparisons of consumer price levels • Preliminary results from one experiment • Concluding remarks Geneva, 8-9 May 2008

  3. Joint UNECE/ILO Meeting on Consumer Price Indices • Introduction Investigate the factors that can affects comparisons of consumer price levels between two areas The aim of the paper focusing on the comparisons across different areas or regions within a country suggest a simple method to evaluate the importance of the different factors Our proposal is theoretical in order to point out the methods and the detailed data which are necessary to interpret adequately the binary consumer spatial indices • The measures could be helpful • for deciding to what extent the products included in the list for the computation of spatial indices should be comparable and/or representative and characteristic of the household consumption • for integrating CPI and PPP work, or to balance comparability and representativeness Geneva, 8-9 May 2008

  4. Joint UNECE/ILO Meeting on Consumer Price Indices 2. Difficulties in interpreting PPPs: comparability and representativeness (a) • Difficulties of the interpretation and criticisms to binary comparisons of PPPs is due to the conflicting choice between comparability and representativeness • To clarify the problems we need for: • Clear definition of comparability, starting with the definition of strict comparability for identical products which then may be broadened • More precise definition of representativeness of products included in the comparison within the basic headings (BH) Geneva, 8-9 May 2008

  5. Joint UNECE/ILO Meeting on Consumer Price Indices 2. Difficulties in interpreting PPPs: comparability and representativeness (b) The products within a BH should be representative in termsof sample design and for consumer prices in terms of share of households expenditures Different degree of representativeness One or more products are characteristic in one of the two areas of vice-versa Different system of weights Geneva, 8-9 May 2008

  6. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of consumer price levels (a) • A framework for the comparison at BH level • Only Binary comparisons for consumer price level • The hypothesis is that all data on prices and weights at products level are available • We present two different hypothetical situations Geneva, 8-9 May 2008

  7. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of price levels (b) the same number of products with the same characteristics, therefore strictly comparable, are available both in the areas j and l Case1a (purely theoretical condition) Case1b (a more probable situation) Geneva, 8-9 May 2008

  8. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of price levels (c) the systems of weights are equal Case1a [2] Average Prices’Parity the systems of weights are different, with a different degree of representativeness in the two areas Case1b [3] [5bis] Geneva, 8-9 May 2008

  9. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of price levels (d) • usual situation when making binary comparisons Overlapping area Outer areas: separate groups of products considered in the comparisons which can be found in area j but not in area l, and vice-versa Groupof identical products (strictly comparable) with different systems of weights in the two areas (j and l) two more different situations (pag. 6 of paper) Geneva, 8-9 May 2008

  10. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of price levels (e) Considering the right hand side of expression [5bis] and taking into account all the products in the two areas, a new APP could be obtained by introducing a multiplicative factor as follows [10] WE PPE CE characteristicity effect The ratio between the average prices of the characteristic products in the two areasmeasures the effect due to the differences in their consumption baskets Geneva, 8-9 May 2008

  11. Joint UNECE/ILO Meeting on Consumer Price Indices 3. A method for measuring the factors that affect the comparisons of consumer price levels (f) • Using the multiplicative decomposition when the value of the effects are greater than 1, it means that there is a positive influence and vice-versa when they are less than 1 • It is possible to obtain four decompositions • It is possible to aggregate the APP above the BH level and also and also the three different factors • To implement the decomposition we need to have all the elementary information on prices and weights for the groups of products with different comparability and representativeness Geneva, 8-9 May 2008

  12. Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results from one experiment to measure the factors that affect APP at territorial level in Italy (a) • At the level of areas within a country the consumption baskets may be more similar (more strictly comparable products) • More comparable data at detailed elementary level are usually available for the areas within a country (collected for CPIs surveys) • Istat started a research project in 2005 to carry out an experiment to calculate CPPs to compare the consumer price levels at regional level (De Carli, Room document) To test the possibility of using and integrating the statistical information currently supplied within the CPI surveys Geneva, 8-9 May 2008

  13. Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results from one experiment to measure the factors that affect APP at territorial level in Italy (b) • The experiment has been conducted for 3 expenditure divisions Food an beverages Clothing and fotwear Furniture New ad hoc surveys CPIs surveys • The experiment refers to 20 cities • Having all the necessary price data we attempted to calculate the APPs and to decompose them in the three components • Unfortunately we do not have on expenditure share at level of products, so the measure obtained are approximate Geneva, 8-9 May 2008

  14. Joint UNECE/ILO Meeting on Consumer Price Indices 4. Preliminary results and concluding remarks • It is clear that the weight effect and the characteristicity effect opay an important role in the binary comparisons of consumer price levels between the different cities in Italy • The results regarding food products show that for some cities the weight effect is substantially less than 1 (min=0.700) and the characteristicity effect is more than 1 (max = 1.535) • For other cities the weight effect is substantially more than 1 (max = 1.309) and the characteristicity effect less than 1 (min =0.586) • Results obtained are very encouraging because they stress the importance to have this kind of measures to make correct decisions in the implementation of CPPs • Further researches are necessary Geneva, 8-9 May 2008

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