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ICP Book - Measuring the Real Size of the World Economy

World Bank Development Economics Data Group releases Book

Measuring the Real Size of the World Economy

The Framework, Methodology, and Results of the
International Comparison Program (ICP)

Edited by the World Bank

Measuring the Real Size of the World Economy is the most comprehensive accounting ever presented by the International Comparison Program (ICP) of the theory and methods underlying the estimation of purchasing power parities (PPPs). PPPs reveal the relative sizes of economies by converting their gross domestic products and related measurements into a common currency, thereby enabling comparisons based on economic and statistical theory.

The ICP is a global statistical initiative; its foundation is the comparison of national prices of a well defined basket of goods and services under the conceptual framework of the System of National Accounts. The ICP faces unique challenges in providing statistical methodology that can be carried out in practice by countries and economies differing in size, culture, the diversity of goods and services available to their population, and statistical capabilities.

The ICP has a rich history beginning in 1968. Each successive round brought new and improved methodologies regarding the theory and application of price indexes. The purpose of Measuring the Size of the Real Economy is to bring together a presentation of the methodology available for international price comparisons, the choices made for the 2005 ICP, the outcome of those choices, and steps taken to improve the quality of the 2011 ICP results.

By disclosing the theory, concepts, and methods underlying the estimates, this

Book increases the transparency of the ICP process. Greater transparency allows researchers, users of PPPs, and those involved in implementation of the program to better understand the strengths, limitations, and assumptions underlying its results. This book also provides a forward-looking view of methodological developments with an eye toward improving the quality of future comparisons.

The ICP is now the largest and most complex statistical program in the world. In 2005 it included 100 countries and economies, working in parallel with the 46 countries in the Eurostat-OECD PPP program. By 2011, the ICP has grown to include 198 countries and economies.

Measuring the Real Size of the World Economy was prepared by the ICP Global Office in the World Bank Development Economics Data Group, with contributions from the leading international experts in the fields of economics and statistics on international comparisons.

For the full final English version, please click here

Thanks to the Interstate Statistical Committee of the Commonwealth of Independent States a Russian version of the book is also available.

ICP Book Chapters

 

Front matters

An overview of the data collection and the estimation of PPPs at the basic heading, region, and global levels is provided for the non technical reader. The overview includes a summary of the main uses of PPPs. The many choices of methods to estimate PPPs are reviewed along with the reasons for the choices made for ICP 2005. The basic concepts such as transitivity, base country invariance, fixity, and the symmetric treatment of countries are defined and their affect on the methodology used.

Introduction
A summary of key findings regarding inequality and poverty is provided in the context of the innovations made for the ICP 2005 with more countries, more precise definitions of goods and services that were priced, and the new and improved linking method, to name a few.

 

1

The Framework of the International Comparison Program

This is an introductory chapter providing a technical review that starts with the conceptual framework provided by the Gross Domestic Product. PPPs and Price Level Indexes are defined with examples of their use. All steps from data collection to the estimation of the global PPPs are presented in summary form as an introduction to the more detailed presentations in the chapters to follow.

 

2

Governance Structure of the ICP 2005

The ICP is the largest international statistical program in the world and is built upon a foundation of cooperation and trust where countries have to agree upon what is priced, when, and how the results are compiled. The Global, regional, and national governances are described.

 

3

National Accounts Framework for International Comparisons: GDP Compilation and Breakdown Process

This chapter explains how the concepts underlying the GDP must be considered in collecting prices and estimating PPPs. These concepts include defining the final expenditure components of GDP, explaining the prices used to value them, introducing the classifications to be used for the different expenditure components, and describing the data sources commonly used to break down the expenditures into the necessary detail.

 

4

Computation of Basic Heading Purchasing Power Parities (PPPs) for Comparisons within and between Regions

This is the first of a set of three chapters devoted to the estimation of PPPs. The main objective of this chapter is to provide a detailed description of the methods used to compute PPPs at the basic heading level first at the regional level then linked across regions. The Jevons, Jevons-GEKS, CPD, CPRD, and CPDW methods are described, and the reasons for using the CPDW for the ICP 2011 are provided.

 

5

Methods of Aggregation above the Basic Heading Level within Regions

This chapter provides in in-depth review of the methodology available to average (aggregate) basic heading PPPs to the GDP using expenditures as weights. The properties of the traditional methods are provided. A new method (Ikle Dikhanov Balk) was used for the first time by the African region—an extensive annex discusses its properties.

 

6

Methods of Aggregation above the Basic Heading Level Linking the Regions

The different methods for linking the regions for GDP aggregates and the GDP in such a way that the relative country volumes within each region are preserved are presented. The methods used for ICP2005 are reviewed, problems noted, and solutions for improvement offered.

 

7

The Survey Framework: Household Consumption

The next 10 chapters deal with the data collection for household components of the GDP first for regions and for the Ring. These are followed by chapters on data validation and then chapters on the estimation of PPPs for the comparison resistant components such as health, housing, etc. Chapter 7 uses results from the ICP 2005 to describe how the product specifications were determined, products for pricing were chosen for the regional comparisons, and introduces the classification of products as Important or Less Important to be used as weights in the estimation of basic heading PPPs. Guidelines using results from ICP 2005 are provided to determine the number of products to price and the number of outlets to be surveyed. The chapter emphasizes the need to include both the urban and rural domains in the price collection.

 

8

The Ring Comparison—Linking the Regions

A review of linking methods is provided followed by a description of the Ring method used in 2005. This includes the selection of Ring countries, developing the Ring list, and data collection and validation. Results from ICP 2005 are used to evaluate the linking process. The chapter concludes with a set of lessons learned that were instrumental in moving from a large Ring list priced by a few countries to a smaller core list priced by every country. The lessons learned from the inability to use the representativity concept resulted in the simpler Importance classification being introduced for use in ICP 2011. Another significant outcome of the review is that the within region results need to remain open for review until the global validation is completed.

 

9

Validation of ICP Regional Prices and Basic Heading PPPs

A detailed review of the validation methods first with in countries, then between countries is provided. The Quaranta and Dikhanov tables are described along with their relative strengths. The diagnostics provided by these tables are explained and guidelines provided to give the reader a view of the steps taken to ensure comparable products were priced across countries.

 

10

Validation of Basic Heading and Aggregated PPPs

The concept that basic heading and aggregated PPPs also need to be validated is introduced using data from the ICP 2005. Data plots are introduced as a simple way to review basic heading PPPs by country and by basic heading to find outliers needing additional review. The same methods can be applied to the review of the aggregated PPPs and the affect of the weights used by reviewing the Paasche-Laspeyres spreads underlying the Fisher index, and the direct vs. indirect PPPs from the GEKS aggregation.

 

11

Health and Education

The data needed to calculate PPPs for health and education are described. Three kinds of data are required and include prices of household expenditures for health and education services, compensation of government health and education workers, and total expenditures of households and the government for health and education. Because countries differ in how health and education services are provided, the chapter describes the steps taken to ensure comparable results across countries.

 

12

Dwelling Services

The three methods to estimate within region PPPs are described in detail using results from ICP 2005 to assess their relative strengths. The use of the different methods by region posed problems when linking PPPs across regions. The chapter provides a detailed explanation of the linking process for ICP 2005. The conclusion of this analysis is a set of recommendations regarding the use of the direct volume approach for all countries, the use of direct rent data, and the linking method that have been reviewed and endorsed by the TAG.

 

13

Construction

This chapter provides the conceptual framework underlying the estimation of construction PPPs, explains the different pricing methods, and describes the methodology used in ICP 2005 by the ICP regions and the Eurostat-OECD comparison. It concludes with an evaluation of the basket of components method used in the ICP regions with some lessons learned for ICP 2011.

 

14

Machinery and Equipment

This chapter explains how products were defined and prices collected for the expenditure classification of “machinery and Equipment” for ICP 2005. It concludes with lessons learned which is that the role of the countries in establishing the global list of products be increased and the concept of “importance” be applied to the prices. In addition, the data collection process should include obtaining detailed specifications of the items being priced.

 

15

Government Services: Compensation

The main focus is on the price information needed for government services and, in particular, the data needed for compensation of government employees It includes an overview of how the government is treated in the ICP covering both the collective and individual expenditures of government. The specifications for the collection of compensation of government employees for ICP 2005 are provided. The chapter concludes by explaining the changes to be made for ICP 2011, mainly to update the list of government occupations to align them with the ILO International Standard Classification of Occupations. In addition the reporting form seeks more detail such as compensation for different number of years of experience, hours actually worked, and the level of government, to name a few.

 

16

Government Services: Productivity Adjustments

This is a complex chapter covering the use of productivity adjustments for government compensation in three ICP regions. The adjustment method is described and data from ICP 2005 are used to illustrate the effects on the global comparison. A historical review of methods for dealing with nonpriced services is provided. The chapter concludes with a description of the linking method used for ICP 2005 and with a proposal for linking regions in ICP 2011 using productivity adjustments and a global aggregation that has been endorsed by the TAG.

 

17

Reference PPPs

Prices or data to estimate PPPs are not collected for all basic headings because in many instances it is too expensive or simply prices are not available such as for gross operating surplus of government. For these basic headings PPPs are imputed using reference PPPs, that is PPPs based on one or more other basic headings that have already been computed. The chapter explains which reference PPPs were used in ICP 2005, how much of the GDP was covered by imputed PPPs, and their contribution using 2005 data. The chapter concludes with recommendations for ICP 2011 that have also been endorsed by the TAG.

 

18

Extrapolating PPPs and Comparing ICP Benchmark Results

Two issues are presented. One is the method to impute PPPs for countries that did not take part in the ICP to meet data user needs for a complete set of world wide data. The other issue is the extrapolation of PPPs between benchmark periods as published in the World Development Indicator publication produced by the World Bank. Both methodologies are presented along with their underlying concepts and how they should be interpreted against the benchmark results.

19

Overview of Results and Empirical Analysis

The major results from the 2005 ICP are presented. In addition, an empirical analysis is presented to show how results would differ using alternative indexing methods. Specifically, additive vs non results are provided. In addition, the effect of imposing fixity is also provided to aid data users in understanding the final results.

 

20

Absolute Poverty Measures for the Developing World, 1981-2008

The use of PPPs in the measurement of regional and global inequality and to measure regional and global poverty is presented and in part reviews the work of Shaohua Chen and Martin Ravallion and presents their estimates.

 

21

Purchasing Power Exchange Rates for the Global Poor

One of the issues facing poverty analysts is that the national annual prices collected by the ICP may be different from those faced by people at the poverty line. Expenditure patterns of the poor are also likely to be different from the rest of the population. This paper is concerned with the recalculation of PPPs using expenditure patterns of those at the poverty line as well as the resulting effect of the estimates of global poverty. The underlying theory of poverty-weighted PPPs is presented along with methodology that was developed for the analysis.

 

22

International Relative Price Levels: An Empirical Analysis

The structure of international price relatives is examined using cross sectional and time series data from the ICP. They seek answers to questions of interest to international economists such as is the dispersion of relative prices across countries related to whether the product is internationally tradable? Furthermore, is there a systematic relation between the cross-country dispersion of relative price levels and that of income levels? If so, is this sensitive to whether the product is tradable or not? The chapter concludes about the importance of the ICP for understanding international price levels.

 

23

Purchasing Power Parity Estimates: Applications by the International Monetary Fund

The chapter first outlines the IMF’s use of the ICP PPP estimates to guide decisions about the membership quotas and for their World Economic Outlook report and analysis. It then moves to measurement issues that affect their usage, mainly the country coverage, imputation for missing countries, and the periodicity of PPP estimates.

 

24

Using Expenditure PPPs for Sectoral Output and Productivity Comparisons

The chapter outlines the types of PPPs needed for sectoral, single, and multifactor productivity comparisons by industry. It goes on to describe the adjustments needed to convert PPPs by expenditure category into output PPPs by industry and also to explain the conditions under which expenditure PPPs will provide a good proxy for production PPPs. This chapter greatly expands the use of PPPs from the ICP.

Abbreviations

Glossary




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