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1992 Feature Article - International Comparisons of Gross Domestic Product as Purchasing Power Parity
The Australian PPP for commodity A relative to its price in the United States is
0.75 / 0.50 = 1.5
The Australian PPP for commodity B relative to its price in the United States is
1.00 / 1.10 = 0.91
The PPP for commodity A shows that $A1.50 is needed to buy in Australia the quantity of commodity A which can be bought for $US1.00 in the USA. Similarly, it would require $A0.91 to buy, in Australia, the quantity of commodity B which can be bought for $US1.00 in the USA.
PPPs for individual commodities can be aggregated, using weights derived from national expenditure data, to calculate an overall PPP for each country. The current price, or ‘nominal’, value of GDP for each country can then be deflated by its PPP to obtain an estimate of GDP which can be compared across countries. The OECD has calculated PPPs for individual member countries relative to average prices across the OECD to derive the real expenditure values contained in the ABS and OECD publications.
Comparative price level indexes
Comparative price level indexes are derived by dividing the PPPs for each country by the corresponding average OECD PPPs and then by the exchange rate (per $US). Thus, they are standardised PPPs expressed in terms of a single currency - the $US. Like PPPs, they permit comparisons of the relative prices of goods and services within a country but unlike PPPs, they also permit comparisons of prices between countries. Thus, given the expenditure patterns and exchange rates prevailing during 1990, one can compare the prices of goods and services in Australia with those in other OECD countries.
Estimates for years prior to 1990
For the latest issue of cat. no. 5226.0, estimates of gross domestic product at purchasing power parity for years prior to 1990 have been derived by dividing current price estimates of gross domestic product by estimates of PPPs for earlier years. The latter have been derived by extrapolating retrogressively the 1990 PPPs using each country’s annual rate of inflation relative to that of the United States. The measure of inflation used for each country is the implicit price deflator of gross domestic product.
Background to the OECD PPP project
The OECD first became involved in the study of PPPs in the early 1950s. In the 1960s and 1970s the main focus of this work shifted to the Statistical Offices of the United Nations and the European Community. In 1982 the OECD resumed work on PPPs, resulting in calculations of some member country PPPs and real gross domestic product and its components for 1980. Australia first became involved with the PPP project in the 1985 round. The ABS provided detailed expenditure and commodity price data for both the 1985 and 1990 projects. Most of the data contained in the latest issue of 5226.0 relate to 1990.
Analysis of results
The following comments refer to estimates of gross domestic product (GDP) at average OECD prices using purchasing power parities - referred to hereafter as adjusted GDP.
In 1990, Australia’s adjusted GDP per head continued to fall below the OECD average. As indicated in Table 1, Australia’s adjusted GDP per head in 1985 was 2 per cent below the OECD average. In 1990 it had fallen to 6 per cent below the OECD average. As a consequence, Australia’s ranking dropped from joint 10th of the 24 OECD member countries in 1985 to joint 13th in 1990. The USA continued its lead over all other OECD members with a GDP per head in 1990 of $US21,449 (34.5 per cent higher than Australia’s $US15,951). Since 1985, Australia’s average annual growth rate of adjusted GDP per head (4.9 per cent) has lagged behind those of the USA (5.3 per cent) and the OECD average (5.9 per cent).
TABLE 1. RANKING OF OECD COUNTRIES' GDP PER HEAD AT AVERAGE OECD PRICES, USING PURCHASING POWER PARITIES, 1985 AND 1990
Compared with the average OECD expenditure distribution in relation to adjusted GDP per head in 1990, Australia spent relatively little on private consumption (6 per cent less) and capital expenditure on equipment (9 per cent less), but relatively more on government consumption (11 per cent more) and capital expenditure on construction (29 per cent more).
These deviations from the OECD average expenditure distribution mirror, to some extent, the deviations in Australia’s price structure from the OECD average. Australian prices were relatively higher for private consumption (4 per cent higher) and equipment (5 per cent higher) and relatively lower for government consumption (2 per cent lower) and construction (14 per cent lower). Thus, at this broad level of expenditure, Australia spent proportionally more on the goods and services that were relatively cheap - government consumption and construction - and proportionally less on the goods and services which were relatively expensive - private consumption and equipment.
According to 1990 PPP estimates, 1.39 Australian dollars were equivalent to one US dollar. This compares with the prevailing exchange rate of $A1.28 to $US1.00 in 1990. In this sense the Australian dollar was ‘overvalued’ with respect to the American dollar by about 9 per cent. With respect to the OECD as a whole, however, the Australian dollar was ‘undervalued’ by about 5 per cent.
Table 2 contains price level indexes for broad categories of goods and services for Australia, the ‘Group of Seven’ major industrial economies and New Zealand for 1990. Similar comparisons at a more detailed level in 5226.0 show that Australians paid less for food, communications and housing than consumers in any of the ‘Group of Seven’ countries but paid more for personal transport equipment.
TABLE 2. COMPARATIVE PRICE LEVEL INDEXES(a) FOR SELECTED COUNTRIES, 1990 (OECD = 100)
Purchasing power parities provide a measure of relative prices between countries and therefore enable meaningful comparisons of measures of expenditure and GDP. Australia’s ranking against other OECD countries using such measures is made possible by ABS participation in the OECD PPP project. The latest results of this project have recently been published in 'Gross Domestic Product at Purchasing Power Parity in OECD Countries', 1990 (cat. no. 5226.0). This article has provided an explanation of the methodology used and some of the results.
More details are available from the publication mentioned above.
This feature article was contributed by Charles Aspden and Alan Tryde, ABS.
In 1988 and again in 1989, EUROSTAT (the Statistical Office of the European Community) and the OECD, together with the United Nations Statistical Office, convened a group of experts to discuss aggregation methods. The experts recognised that comparisons of price and volume aggregates are used for many different purposes and that there is no one method of aggregation which can be considered satisfactory for all these purposes.
The Geary-Khamis (GK) method uses a weighted arithmetic mean of prices, and was used to produce the estimates published in the 1985 issue of 5226.0. It is known to be affected by the Gerschenkron effect - i.e. a country whose price structure differs from the average price structure used as weights in the aggregation process will have relatively higher volume levels than it would have had if weights more characteristic of its price structure had been used. On the other hand, the GK method provides results which are additive: a requirement not met by aggregation methods free of the Gerschenkron effect.
The experts recommended the calculation and dissemination of two sets of results: one set to be aggregated using the EItelo-Koves-Szulc (EKS) method which uses a weighted geometric mean of prices, the other to be aggregated using the GK method. However, only results derived using the EKS method are available for 1990 at present.
Estimates obtained by the EKS method are not additive, but there is no Gerschenkron effect and they are better suited for comparisons of the prices and volumes of an individual aggregate between countries, for example comparisons between countries of expenditure on or prices of a particular commodity. Those obtained by the GK method are affected by the Gerschenkron effect, but they are additive and better suited to the analysis of price and volume structures across countries, for example comparisons of the relative prices of commodities within one country with the relative prices within another country. Details of the two methods are available on request.
An outcome of the change in methodology is that the estimates presented in the 1985 issue of 5226.0 are not comparable with the estimates presented in the latest issue. To enable comparisons to be made in the latest issue, estimates have been recalculated for years prior to 1990 as described in the article above.
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