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Rates of conversion
To compare a single country’s real GDP over a period of years, it is necessary to remove any movements that are due to price changes. In the same way, in order to compare the real GDPs of a group of countries at a single point in time, it is necessary to remove any differences in their GDPs that are due to differences in their price levels. Price indices are used to remove the effects of price changes in a single country over time; purchasing power parities (PPP) are used to remove the effects of the different levels of prices within a group of countries at a single point in time.
Definition
PPPs are currency converters that equalise price levels between countries. The PPPs shown here have been calculated by comparing the prices in OECD countries of a common basket of about 2 500 goods and services. Countries are not required to price all the items in the common basket because some of the items may be hard to find in certain countries, but the common basket has been drawn up in such a way that each country can find prices for a wide range of the goods and services that are representative of their markets.
The goods and services to be priced cover all those that enter into final expenditure – household consumption, government services, capital formation and net exports. Prices for the different items are weighted by their shares in total final expenditures to obtain the GDP PPPs shown here.
Comparability
The PPPs shown here have been calculated jointly by the OECD and Eurostat using standard procedures. In consultation with their member countries, OECD and Eurostat keep their methodology under review and improvements are made regularly.
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Long-term trends Over the period 1992-2005, movements of PPPs and exchange rates were rarely similar and even when they moved in the same direction they were not of the same magnitude – see for example Ireland and Portugal in the graph on the opposite page. Exchange rates are sometimes used to convert the GDPs of different currencies to a common currency. However, comparisons of GDP based on exchange rates do not reflect the real volumes of goods and services in the GDPs of the countries being compared. For many of the low income countries, the differences between GDP converted using exchange rates and real GDP converted using PPPs are considerable. The differences are illustrated in the second graph. For Slovak Republic, for example, the difference between PPP-converted GDP and exchange rate-converted is over eighty per cent. In general, the use of exchange rates understates the real GDP of low-income countries and overstates the real GDP of high-income countries. The price level indices in the third table are the PPPs divided by exchange rates, with the OECD set to 100. In general, there is a positive correlation between income levels and price levels; Denmark, Iceland, Norway and Switzerland, four high-income countries, had the highest price levels in 2005 while the Czech Republic, Hungary, Poland, the Slovak Republic and Turkey, five four poorer OECD countries, had price levels around fifty to sixty per cent of the OECD average. |
Source
- OECD (2005), Purchasing Power Parities and Real Expenditures – 2002 Benchmark Year, 2004 Edition, OECD, Paris.
Further information
Analytical publications
- Schreyer, P. and F. Koechlin (2002), "Purchasing Power Parities – Measurement and Uses”, OECD Statistics Brief, No. 3, March, OECD, Paris, www.oecd.org/std/statisticsbrief.
Statistical publications
- OECD (2006), National Accounts of OECD Countries, OECD, Paris.
- OECD (2006), Main Economic Indicators, OECD, Paris.
Websites
- OECD Purchasing Power Parities, www.oecd.org/std/ppp.
- Joint World Bank-OECD Seminar on Puchasing Power Parities, 2001, www.oecd.org/std/ppp/seminar2001.
| Texts | |
| • | Indicator web page |
| • | Indicator in PDF |
| Tables (xls) | |
| • | Purchasing power parities |
| • | Exchange rates |
| • | Indices of price levels |
| Graphics | |
| • | Changes in exchange rates and purchasing power parities |
| • | Percentage differences in GDP when converted to US dollars using exchange rates and PPPs |
| • | Comparative price levels |
Changes in exchange rates and purchasing power parities
Percentage differences in GDP when converted to US dollars using exchange rates and PPPs
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