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
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.