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PPPs for policy making: a visual guide to using data from the ICP - Technical note


Concepts and definitions

Purchasing power parities (PPPs)

PPPs are both currency conversion factors and spatial price indexes. They convert different currencies to a common currency and, in the process of conversion, equalize their purchasing power by controlling for the differences in price levels between economies. They show, with reference to a base economy, the relative price of a given basket of goods and services in each of the economies being compared. The common currency used for global ICP comparisons is the United States dollar and are presented within this compendium as PPP$. WDI publishes PPPs as PPP conversion factors.

Price level indexes (PLIs)

An economy’s PLI for a given expenditure component is its PPP for that expenditure component divided by the economy’s market exchange rate relative to the reference economy or region, which typically has an index level of 100. The ICP provides PLIs based on World = 100. If an economy’s PLI for a given expenditure component is lower than that of another economy, then the goods and services within that expenditure component are less expensive than those in the other economy. Conversely, if an economy’s PLI is higher than that of another economy, then these goods and services are more expensive than those in the other economy. When indexed to the same reference economy or region, PLIs can be used to directly compare price levels across economies, unlike PPPs. WDI publishes PLIs as price level ratios.

PPP-based GDP and real expenditures

ICP comparisons of GDP are based on the sum of the final expenditures on goods and services plus exports less imports of goods and services as classified by the System of National Accounts. This approach allows comparison of the levels of the principal elements of final demand, that is, consumption and investment, and informs many different types of economic analysis, including forecasting and poverty analysis.

Economies estimate their nominal expenditures on GDP and its expenditure components at national price levels and in local currency units. To compare the volumes of goods and services produced by economies, differences in national price levels need to be controlled for and local currency units need to be converted to a common currency. This is achieved by dividing expenditures in local currency units by PPPs. Thus, comparisons of the resulting PPP-based expenditures, termed real expenditures, reflect only the differences in volumes between economies.

PPP-based per capita expenditures are real expenditures divided by the mid-year population.

Chapter 3 of Purchasing Power Parities and the Size of World Economies  provides further details of ICP concepts and definitions.