Comparison of price levels in Europe

Purchasing Power Parity

Purchasing power parities are price level indicators expressing the price level in a given country at a given time, relative to the price level in one or more other countries. The purchasing power parity between two countries, A and B, expresses the number of units of country B's currency one would need in country B in order to maintain the purchasing power of one unit of country A’s currency in country A. If a given product costs 100 Norwegian kroner in Norway and 10 euros in Germany, the purchasing power parity between the two countries, for this product, equals 10/100 = 0.10 with Norway as the base country, or 100/10 = 10 with Germany as the base. This means we need 0.10 euros in Germany in order to maintain the purchasing power of one krone in Norway, or 10 kroner in Norway in order to maintain the purchasing power of one euro in Germany. Purchasing power parities can be computed for individual products or for aggregates, such as GDP or actual individual consumption. In the calculation of purchasing power parities for aggregates, parities are weighted with expenditure shares from national accounts.

Price level adjustment

Price level adjustment is understood in this context as the conversion of monetary aggregates expressed in national currencies and at national price levels into a common price level and a common, technical currency using PPPs.

Purchasing power standard

The Purchasing power standard (PPS) is the name given by Eurostat to the artificial currency unit in which countries’ national accounts aggregates are expressed when adjusted for price level differences. Figures in PPS are comparable, spatial volume figures because the price component of each individual country has been replaced by a common price component for all countries. The PPS in Eurostat’s terminology corresponds to the term "international dollar" used by the OECD and the World Bank.

Relative price levels and price level indices

The relative price level is understood as the price level of one country relative to the price level of one or several other countries at a given point in time. The relative price level is often expressed as a price level index (PLI). PLIs are derived by dividing the PPP by the respective nominal exchange rate, and usually multiplied by 100.

Prices

Countries of participating countries are required to price consumer goods and services, capital goods and general government services.

Consumer goods and services: Purchasers’ prices for a selection of consumer products and services. VAT, non-refundable taxes and possibly subsidies are included in the prices. From 2016, discount prices are included together with the normal prices in the survey. Exceptions are discounts which are not available for all customers.

For housing services, data from the Rental Market Survey is used in order to estimate the price level of both rented and owner-occupied housing. The price of owner-occupied housing is estimated on the basis of owners’ equivalent rent of primary residence principles.

Capital goods and services: Prices for capital goods are collected once every two years. These prices are obtained from producers, importers, distributors or actual purchasers. The prices collected can be for actual or hypothetical market transactions.

The price survey for investment in construction is conducted annually in cooperation with external construction experts. Rates are calculated for various types of standard residential buildings, commercial buildings and civil engineering works, and includes in addition to the pure construction costs contractors' profit margins, the cost of architectural and engineering consultants, and sales tax.

General government services: Since general government services are non-market services, they are generally valued using prices of the input used in their production. Since labour is the most important component in these services, only labour wages are priced. In principle, the cost data should be national annual averages of wages for each sample occupation, to be extracted from registers or other statistical sources.

Government services consumed by private households’ neither have no market prices. This pertains to education and hospital services. The costs of educational services are estimated by Eurostat using a unit price per pupil or student on the basis of existing education statistics. For hospital services quasi-prices are estimated for a range of specified services such as heart surgeries, prostate surgeries and caesarians.

Weights and auxiliary data

Individual products priced within the framework of the ECP are aggregated up to more extensive consumer groups. From the lowest aggregate level (the "basic heading" level) and upwards, weighting is based on expenditure shares from national accounts.

Aside from the prices and adjustment factors, participating countries have to provide expenditure weights at basic heading level, exchange rates and mid-year resident population figures as well as estimates of GDP and its main sub-aggregates.

Comparability, representativity and equi-representativity

These concepts must be seen in context. The comparison of goods and services across countries is in reality a comparison based on technical specifications. However, products need to be not only comparable in technical terms, but also representative of the consumption pattern in individual countries. It is often necessary to compromise between comparability and representativity. For example, international branded goods will typically be identical across countries and thus have a high degree of comparability, but at the same time they are not always representative of the consumption pattern.

Ideally, the product sample should be equally representative for all the participating countries ("equi-representativity"). A basket of goods is defined as equally representative in different countries when it provides equal satisfaction or utility. Failure to comply with the requirement of equi-representativity can produce a bias in the results because a representative goods basket can be assumed to have lower prices than a non-representative goods basket.

ESA2010

The European System of National and Regional Accounts, ESA2010, is the international guidline used for the production of national accounts in the European Economic Area (EEA) countries. ESA2010 defines the classification of consumption and investment used in the ECP.

Basic heading

A basic heading is the lowest level of aggregation used in the computation of purchasing power parities. Below the level of the basic heading, we find the individual products of the product sample. In the aggregation process, numerical weights based on a detailed breakdown of national accounts expenditures are applied to each basic heading. Below the level of the basic heading, there are usually no numerical weights.

Transitivity and multilaterality

Transitivity is the property whereby the PPP between any two countries can be estimated through a third country, yielding the same result as a direct comparison. For example, in the case of the three countries A, B and C, the ratio of the PPP between A and B and the PPP between C and B is equal to the PPP between countries A and C. This approach results in a matrix with multilateral parities, something which allows missing price data from one or several countries to be replaced by estimated figures. Multilaterality implies that any change in the input data of any country will have an impact not only on that country, but on all countries in the comparison.

Analytical categories

The analytical categories are the main aggregates, the expenditure categories, the expenditure groups and expenditure classes for which the results of the comparison are published. Examples of aggregated published results are actual individual consumption, clothing and footwear, and investment in building and construction. For consumption, analytical categories mainly follow the national accounts concept of "actual individual consumption". In addition to goods and services bought and paid for by households, actual individual consumption includes public services consumed individually (for example, health and education services), as well as services provided by non-profit institutions serving households.

The ECP follows the classification of GDP as defined in the ESA. Detailed classifications based on the following main classifications have been prepared specifically for the ECP:

*European Classification of Individual Consumption According to Purpose (ECOICOP)

*Classification of the Purposes of Non-Profit Institutions Serving Households (COPNI)

*Classification of the Functions of Government (COFOG)

*Statistical Classification of Products by Activity (CPA)