World Comparison Real Gross Domestic Product and Purchasing Power

II. NOTES ON THE ICP METHODOLOGY

The basic task of the ICP is to convert the gross domestic product (GDP) and its main aggregates of various countries to a common currency and to make them directly comparable. The calculation of the purchasing power parities (PPPs) is needed for the conversion of national currencies, rather than using official exchange rates. The main thrust of the ICP methodology has been to obtain quantity comparisons by means of price and expenditure comparisons. Expenditures on GDP were broken down into detailed categories, termed basic headings, and expenditure estimates for each basic heading were reported by the participating countries. In the 1985 ICP, 150 to over 250 basic headings were used, depending on region. For each basic heading, prices were collected and compared among all participating countries from a set of representative items in common use. In the process, PPPs are obtained and used instead of exchange rates for converting data into a common currency. The PPP is defined in such a way that the same amount of dollars exchanged at these rates would buy the same amount of goods and services in every country. Once the PPPs are available, GDP and its main aggregates can be compared in real rather than nominal terms for each country. In this rendering the adjusted GDP series are representing internationally comparable quantities, which are adjusted for the purchasing power differences of the national currencies.

The quality of ICP comparisons depends heavily on the individual item prices. For ICP purposes, rather detailed item specifications are used. These closely describe the items to be priced, with reference to their basic physical characteristics, quality and the unit to be priced. These specified prices will establish the price parities at the basic heading level and provide much insight into the price levels and the structure of prices in the countries involved. In turn, such price information permits the calculation of real-term comparisons of the total GDP and its components across countries. The prices collected in each country must be of the same quantity and quality as the specifications selected among countries. In particular, these include the unit sizes and delivery conditions (e.g., package, warranty etc.). For GDP comparisons, higher quality products are considered to encompass more quantity than lower-quality products do. Hence, the extensive attention in the ICP to the issues of specifications, quality assessments and adjustment procedures (when the qualities are divergent for the same goods or services in various countries) is needed to produce appropriate quantity comparisons across countries.

Price comparisons in certain areas require special treatment. In the areas of health, education and government services, where prices often are non-existent or hard to compare indirect price comparisons are also used in the ICP on the basis of an input approach. Construction prices are compared in a procedure of pricing the same standard objects in each country.

After the detailed expenditures have been reported and price ratios have been derived from the prices for individual goods and services previously collected, the next step is to calculate PPPs and real values for the various aggregate categories and the GDP by using multilateral index systems and aggregation methods.

The detailed description of the ICP methodology can be found in the Handbook of the International Comparison Programme, a United Nations publication. In addition, the regional comparison reports are rich sources of information on the methodology applied. For clarification of terms and quick reference to other selected aspects of the methodology, the Glossary can be consulted.