Constructing Purchasing Power Parities Using a Reduced Information Approach: A Research Study

CONSTRUCTING PURCHASING POWER PARITIES USING A REDUCED INFORMATION APPROACH

A RESEARCH STUDY

JANUARY 2021

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ISBN 978-92-9262-674-7 (print); 978-92-9262-675-4 (electronic); 978-92-9262-676-1 (ebook)

Publication Stock No. TCS210012-2

DOI: http://dx.doi.org/10.22617/TCS210012-2

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Notes:

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Cover design by Rhommell Rico.

Cover photos by Eric Sales and Jawad Jalali for ADB.

Far Left: Students attentively watch their teacher’s presentation at a high school in Mongolia.

Inside Left: A woman prepares fabric for sale at a textile shop in Bhutan.

Inside Right: A purchase is made at the Mandave market in Kabul, Afghanistan.

Far Right: Fresh foods on display at the Gum Market in Yerevan, Armenia.

Contents

Tables and Figures

Foreword

Since the turn of the millennium, there has been increasing use of purchasing power parities (PPPs) and PPP-based gross domestic product data, produced under the International Comparison Program (ICP), for economic and statistical analysis. This includes the use of PPPs in calculating indicators that help monitoring some of the critical goals and targets of the Sustainable Development Goals.

The ICP is, however, a highly complex global program that demands significant allocation of human and financial resources and years of careful planning in implementing price-collection surveys.

Because of the immense resources needed for data collection and project management during an ICP benchmark year, ICP cycles have not been conducted frequently and PPPs for nonbenchmark years have been conventionally estimated using simple extrapolation techniques. However, when there are long intervals between ICP cycles, this methodology yields estimates that are inconsistent with the benchmark figures. The wide differences between the extrapolated PPPs and the actual benchmarks for the ICP’s 2005 and 2011 cycles led to considerable debate among statisticians and development practitioners. The Asian Development Bank (ADB) has therefore undertaken methodological research initiatives to find cost-effective alternative approaches to PPP estimation during nonbenchmark years. The core list approach was developed in ADB’s 2009 research study, 2009 Purchasing Power Parity Update for Selected Economies in Asia and the Pacific (ADB 2012a).

A second similar study for 2016 was conceptualized after the release of the results of the ICP’s 2011 cycle and before the 2017 cycle was announced, to validate the methodologies developed in 2009. The study aimed to assess the use of 2016 prices from capital cities of a reduced or core product list, to produce accurate estimates as though a full-scale ICP cycle had been implemented in that year. It should, however, be noted that, while price collection for this research study was in progress, simultaneous preparations for the ICP’s 2017 cycle also needed to be initiated—pursuant to the recommendations of the United Nations Statistical Commission in March 2016. Given the importance of the 2017 cycle, and to follow the global schedule for its completion, work on the full-scale ICP benchmark was prioritized and finalization of the research report on the 2016 data was deferred until the main 2017 ICP reports were completed and released, which occurred in October 2020.

With the analytical work on the 2016 data now undertaken, this report presents the methodology and estimates of 2016 PPPs for the currencies of the 20 participating economies, price levels, and real (PPP-converted) gross domestic product and its major components. This analysis takes into account individual consumption expenditure by households, government final consumption expenditure, gross fixed capital formation, changes in inventories and acquisitions less disposals of valuables, and balance of exports and imports.

By contributing to the efforts to develop alternative and cost-effective methods of estimating PPPs for nonbenchmark years of the ICP, this research study will guide the Asia and Pacific region as it moves to implement a 3-year ICP cycle, following recommendations of the United Nations Statistical Commission, before eventually moving to the generation of annual PPPs.

There are, of course, many people who have devoted countless hours to the successful completion of this project. I wish to express my sincere appreciation and thanks to the World Bank ICP Global Office for the technical assistance in shaping the methodology in the early stages of the study; the dedicated ICP team of ADB’s Statistics and Data Innovation Unit; other individual experts associated with the study; and, most importantly, the implementing agencies in the 20 participating economies. Without the dedicated efforts of these implementing agencies in conducting the prices surveys and compiling the national accounts estimates needed, this research program would not have been successful.

Yasuyuki Sawada

Chief Economist and Director General

Economic Research and Regional Cooperation Department

Asian Development Bank

Acknowledgments

This research study on 2016 purchasing power parities (PPPs) was carried out under the International Comparison Program (ICP) for Asia and the Pacific and was implemented by the Statistics and Data Innovation Unit of the Economic Research and Regional Cooperation Department of the Asian Development Bank (ADB).

The ICP team at ADB worked closely with the implementing agencies of the 20 participating economies in conducting the price surveys, and during validation of prices and national accounts, in order to compile the data needed for the research study. Special thanks to the heads of implementing agencies, designated ICP national coordinators, deputy national coordinators, and the ICP teams in the 20 participating economies for their cooperation, dedication, and hard work in collecting and validating the data needed for the study: Bangladesh Bureau of Statistics, Bangladesh; National Statistics Bureau, Bhutan; Department of Economic Planning and Statistics, Brunei Darussalam; National Institute of Statistics, Cambodia; Fiji Bureau of Statistics, Fiji; Census and Statistics Department, Hong Kong, China; Ministry of Statistics and Programme Implementation, India; Badan Pusat Statistik, Indonesia; Lao Statistics Bureau, Lao People’s Democratic Republic; Department of Statistics, Malaysia; National Bureau of Statistics, Maldives; National Statistics Office of Mongolia, Mongolia; Central Bureau of Statistics, Nepal; Pakistan Bureau of Statistics, Pakistan;