Definition: Country-product-dummy method

Category: Purchasing power parities

The multilateral method used by the ICP (International comparison programme) to obtain transitive PPPs (Purchasing power parities) at the basic heading level through regression analysis. It treats the calculation of PPPs as a matter of statistical inference, an estimation problem rather than an index number problem. The underlying hypothesis is that, apart from random disturbance, the PPPs for individual products within a basic heading are all constant between any given pair of countries. In other words, it is assumed that the pattern of relative prices of the different products within a given basic heading is the same in all countries. It is also assumed that each country has its own overall price level for the basic heading and it is that which fixes the levels of absolute prices of the products in the basic heading for the country. By treating the prices observed in the countries for the basic heading as random samples, the PPPs between each pair of countries and the common pattern of relative prices can be estimated using classical least square methods. The method allows sampling errors to be estimated for the PPPs. http://ec.europa.eu/eurostat/product?code=KS-RA-12-023&mode=view Eurostat and Organization for Economic Cooperation and Development (OECD), "Eurostat - OECD Methodological manual on purchasing power parities (2005 Edition)", Methods and Nomenclatures, Office for Official Publications of the European Communities, Luxembourg, 2006European Union, Regulation (EC) No 1445/2007 establishing rules for the provision of basic information on PPPs, Official Journal of the European Union No L 336, 20.12.2007, p. 1 - 24