Definition: Purchasing power parity

Category: Purchasing power parities

"Spatial deflators and currency converters that eliminate the effects of the differences in price levels between Member States (countries), thus allowing volume comparisons of GDP (Gross domestic product) components and comparisons of price levels." Article 3(a) PPP (Purchasing power parity) Regulation.

PPPs are calculated in three stages: first for individual products, then for groups of products or basic headings and, finally, for groups of basic headings or aggregates. PPPs for individual products are ratios of national prices in national currencies for the same good or service. The PPPs for basic headings are unweighted averages of the PPPs for individual products. The PPPs for aggregates are weighted averages of the PPPs for basic headings. The weights used are the expenditures on the basic headings. PPPs at all stages are price relatives. They show how many units of currency A need to be spent in country A to obtain the same volume of a product or a basic heading or an aggregate that X units of currency B purchases in country B. In the case of a single product, the same volume means identical volume. But in the case of the complex assortment of goods and services that make up an aggregate such as GDP, the same volume does not mean an identical basket of goods and services. The composition of the basket will vary between countries according to their economic, social and cultural differences, but each basket will provide equivalent satisfaction or utility. http://ec.europa.eu/eurostat/product?code=KS-RA-12-023&mode=view