The overall PPP for GDP is built up from comparisons of item prices within smaller groups of expenditures that, in the terminology of the ICP, are referred to as basic headings. The requirement for basic headings are that:
- Value data, representing national expenditures, can be estimated for each basic heading.
- Basic headings be as homogeneous as possible from the point of view of the potential dispersion of the price ratios across countries of the goods and services belonging to each respective heading.
Usually, the basic heading level is chosen on the basis that within a basic heading more detailed expenditure weights are not available. Since country groups will differ on the amount of expenditure detail that is available, the number of basic headings has varied between 150 and 250 for different regions and country groupings within the ICP.
Within each basic heading, a country will provide prices for a selection of individual items from a set of written specifications developed by the ICP over the years. Within a basic heading price ratios of individual items, for example, a kilo of “long grained rice in a plastic bag” are aggregated to produce price parities at the basic heading level.
The price ratios and basic heading parities are all denominated in CCUs, national currency units per unit of the numeraire currency. For example, if country A is the numeraire country and its price for long grained rice is $2 per kilo, and the price in country B is 28 rupees per kilo, the price ratio will be 14 Rs/$.
The input provided by the country statistical offices to the ICP, thus, are expenditures at the basic heading level and prices of items representing the corresponding basic heading for that country. This is the first and most basic step in moving from national data to international comparisons of real volumes and purchasing power parities.
Chapter 1 of the ICP 2003-2006 Handbook provides a thorough introduction to the calculation of Purchasing Power Parities.
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