PPPs for Industry Output:
A New Dataset for International
Comparisons
Bart van Ark, Marcel Timmer and Gerard Ypma
Groningen Growth and Development Centre
Presentation prepared for Discussion session
on Productivity Levels and PPPs, Bern, 18 October 2006
This work is partly funded by an NSF research project on “Improved Methods of
Estimating Production and Income across Nations” and by the EU 6th Framework
Programme on EU KLEMS “Industry Productivity in the EU”
1
Background
 Increased attention for PPPs (theory,
methodology and practical applications)
 Largely based on expenditure PPP (concepts
and databases (e.g., ICP and PWT)
 Various applications deserve use of PPPs by
industry (productivity, price convergence,
Balassa-Samuelson hypothesis, historical work)
 Use of production PPPs is hampered by a
range of problems (small country coverage &
bilateral nature, lack of readily available price
surveys, double deflation, unit values, weak price
measures for services, reconciliation problems
with E-PPPs)
2
Double Motivation of Paper
 Provide link between expenditure and output
prices:
 Based on system of supply-use tables
 Develop criteria for use of expenditure prices
or production prices for construction of industry
PPPs
 Provide new dataset of industry PPPs:
 Based on a mix of production PPPs and
adjusted (‘peeled’) expenditure PPPs
 45 industries
 26 countries, including 19 EU member states
 New benchmark year 1997
3
Supply-Use Tables is Useful Framework to
Reconcile Expenditure & Output Prices
 Basic identity that equals use and supply of
products:
 intermediate consumption + final consumption
+ gross capital formation + exports = domestic
output + imports
 Products can be valued at three price concepts:
 Basic price of the product received by the producer
 Producer price = basic price + taxes on the product
- subsidies on the product
 Purchasers’ price = producer price + trade and
transport margins in delivering the product to the
purchaser
4
Link between expenditure and output prices (1)

Y
M

P
X

P
F

P
E

(
1

t

r
)
P
Y

P
j
ij
i
i
i
i
i   ij ij
i Mi
 j
X
ij
F
E
S
i
S
M i = the imported quantity of product i
Fi = quantity of product i for final domestic demand
Ei = quantity of product i exported
Yij = the quantity of commodity i produced by industry j
X ij = the quantity of commodity i used as intermediate input by industry j
pijY
= the basic price received by industry j for selling commodity i
pijX
= the purchasers’ price paid by industry j for intermediate consumption
piM = the basic (c.i.f) price of imported commodity i.
piF = the purchasers’ price for final domestic demand of commodity i
p iE = the purchasers’ (f.o.b) price of exported commodity i
ri S = trade and transport margin rate on supplied product i
t iS = net tax rate on on supplied product i
5




Link between expenditure and output prices (2)
 Result 1: equation (5)
~F
P  P  A E ,M  A X
Y
~
PF 
A E ,M 

1
F
P
(1  t S  r S )

(5b)


 E
F E
S
S
M
F M 
P

P

(
1

t

r
)
P

P
Y
Y 
(1  t S  r S ) 
1
A
X


Xj
1
X
F

Pj  P
S
S 
(1  t  r ) j
Y
(5d)
6
Link between expenditure and output prices (3)

Assumption 2
PijX  Pi F
i
Pi E  Pi F
i
(1  tiS  ri S ) Pi M  Pi F

i
Table 2
No int. trade
Only Export
E ,M
Final (1) 0
(4) A
<0
Only
use
Only Intermed (2) n.a.
use
X
Both uses
(3) A < 0
(5) n.a.
(6) A
E ,M
Only Import
(7) A
E ,M
(8) n.a.
+
A X <0 (9) ?
Both
>0 (10) ?
(11)n .a.
(12) ?
7
Link between expenditure and output prices (4)
 Result 3:
 A. Only for final goods, which are not internationally traded,



the adjusted final expenditure price are equal to the basic
output prices.
B. When the product is only used for intermediate
consumption, the domestic output price cannot be estimated
on the basis of a final expenditure price.
C. When a product is mainly exported, the adjusted final
expenditure price will overestimate the basic output price.
D. In all other cases, the adjusted final expenditure price
provides a biased estimator of the basic output price which
size depends on the differences in purchasers’ prices and the
ratio of import, export and intermediate consumption to total
output.
8
Pro’s and con’s of production PPPs &
adjusted expenditure PPPs

Production PPPs:





Adjusted Expenditure PPPs:






In theory preferable
Often based on unit value ratios (product mix problems)
Often biased towards relatively homogeneous products
Problems with services output prices
Based on separate price survey
Applicable to limited number of industries
Detailed information on margins and net taxes is often lacking
Import and export adjustments are very problematic
Adjustment for intermediate inputs as well.
With application of SUT-based criteria better choice, but
remains largely empirical issue on industry by industry basis
9
Table 3 Assessment of production PPPs & adjusted
expenditure PPPs for industry comparisons
Industry
Agriculture
Mining and quarrying
Manufacturing
Food, drink & tobacco
Basic goods
Non-durable
Durable
Electricity, gas and water supply
Construction
Trade
Hotels & catering
Transport
Communications
Finance
Real estate activities
Business services
Public administration and defence,
education and health
Other services
Grade
Adjusted
expenditure Production
PPP
PPP
ISIC rev. 3 code
01-05
0
5
10-14
0
4
15-37
15,16
3
4
17,20,21,23-28
1
4
18,19,22,36,37
2
4
29-35
2
2
40,41
3
2
45
4
0
50-52
0
2
55
4
0
60-63
1
3
64
2
3
65-67
1
0
70
4
0
71-74
1
0
75, 80,85
90-95
1
2
0
0
Remark
Adjusted expenditure
PPP
Not available
Not available
Trade intensive
Small expenditure share
Trade intensive
Trade intensive
Low expenditure share
Not available
Small expenditure share
Small expenditure share
Reference PPP
Small expenditure share
Mainly based on input
PPPs
Small expenditure share
Production PPP
-
Final choice in this
database
production
production
Quality problem
Quantity problem
Not available
Quality problem
Not available
Quality problem
Quality problem
Not available
Not available
Not available
Mainly production
Mainly production
Mainly production
production/expenditure
expenditure/production
expenditure
production
expenditure
production
production
expenditure
expenditure
expenditure
Not available
Not available
expenditure
expenditure
Note: ranking indicates 0 (not available), 1 (very poor), 2 ( poor), 3 (acceptable), 4 (useful) and 5 (very useful).
Source: assessment based on expenditure PPPs for OECD from 1999 round and production PPPs for 1997 from Groningen
Growth and Development Centre, ICOP-project, see section 4.
A New ICOP Dataset for Industry outputPPPs

Improvements over previous ICOP studies:
 country and industry coverage is much bigger
 uses consistent criteria for the selection of the PPP
method
 Above 221 industry (“basic heading”) level use of EKS
multilateral weighting system
 Weights are based on gross output or “matched output”
 Below industry (“basic heading”) level use of best
possible source on broad sector basis
11
Agricultural PPPs are based on off-farm prices
from FAO database
FRANCE
Agriculture, forestry and
fishing
EKS PPP
Industry
(FF/US$)*
output in
1997 mln FFR output weighted
Relative
price level
(PPP/exch. rate)
Number of
product
PPPs
%-coverage
of output
with PPPs
Growing of crops
Farming of animals
Mixed farming
Agricultural services
Hunting
Forestry
Fishing
59
11
0
0
0
0
0
72%
77%
0%
0%
0%
0%
0%
220,581
147,416
56,269
16,201
360
23,203
12,076
9.06
6.65
7.83
7.83
7.83
7.83
7.83
1.55
1.14
1.34
1.34
1.34
1.34
1.34
Agriculture, forestry and
01-05 fishing
70
67%
476,107
7.83
1.34
011
012
013
014
015
020
050
* PPPs within individual industries are Fisher PPPs with U.S. as base
With exception of East European Countries,
U.S. has lowest prices in agriculture
4.89
Relative Price Levels Agriculture, 1997
3.0
2.5
2.0
1.5
1.0
0.5
JP KO NO TA GR FI
IT UK FR NL IR LU SW DK PO BE ES AT DE CA AU US SK CZ HU PL
Manufacturing PPPs for EU countries are now
based on common database for manufacturing
products (PRODCOM), matched through
Germany with US
FRANCE
Manufacturing
15-16 Food, drink & tobacco
Food, drink & tobacco (EKS PPP)
151 Production, processing and preserving of meat
152 Processing and preserving of fish and fish products
153 Processing and preserving of fruit and vegetables
154 Manufacture of vegetable and animal oils and fats
155 Manufacture of dairy products
156 Mnf. of grain mill products, starches & starch products
157 Manufacture of prepared animal feeds
158 Manufacture of other food products
159 Manufacture of beverages
160 Manufacture of tobacco products
O-PPP/
E-PPP
Number of
product
PPPs
%-coverage
of output
with PPPs
Coefficient of
variance
183
65%
O-PPP
O-PPP
O-PPP
E-PPP
O-PPP
O-PPP
O-PPP
O-PPP
41
15
25
0
20
15
2
53
79%
99%
61%
55%
84%
72%
22%
48%
0.03
0.02
0.09
0.05
0.04
0.03
0.36
0.03
O-PPP
na
12
0
73%
0%
0.05
0.00
Industry
output in
1997 mln
FFR
EKS PPP
(FF/US$)*
via
Germany
Relative
price level
(PPP/
exch. rate)
1.21
172,952
11,417
31,141
15,441
125,456
28,141
48,697
192,025
7.00
7.04*
7.54
6.35
7.91
7.08
7.87
7.84
5.09
6.72
93,947
5,359
7.35
7.00
1.26
1.21
724,577
1.29
1.09
1.36
1.21
1.35
1.34
0.87
1.15
Manufacturing PPPs show considerable larger
output and product coverage than before
FRANCE
Manufacturing
15-16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36-37
Food, drink & tobacco
Textiles
Clothing
Leather and footwear
Wood & products of wood and cork
Pulp, paper & paper products
Printing & publishing
Mineral oil refining, coke & nuclear fuel
Chemicals
Rubber & plastics
Non-metallic mineral products
Basic metals
Fabricated metal products
Mechanical engineering
Office machinery
Electrical machinery and apparatus
Radio, television and communication eq.
Medical, optical and precision instruments
Motor vehicles
Other transport equipment
Miscellaneous manufacturing
15-37 Total manufacturing
Number
of
product
PPPs
183
33
17
19
36
34
11
0
101
42
55
42
38
58
0
1
1
11
3
0
11
696
%-coverage
of which
of output
coverage
with PPPs with adjusted
E-PPPs
65%
1%
17%
9%
9%
0%
48%
0%
51%
0%
33%
0%
39%
0%
41%
41%
32%
13%
48%
0%
42%
0%
23%
0%
8%
1%
14%
7%
17%
17%
7%
7%
17%
17%
19%
19%
63%
32%
14%
14%
17%
12%
36%
10%
Industry
Fisher PPP
output in
(FF/US$)*
1997 mln
via
FFR
Germany
724,577
7.00
106,121
7.57
79,633
16.00
25,884
6.27
61,640
6.05
114,405
6.22
202,612
8.34
188,489
3.00
486,779
6.55
163,137
4.45
124,465
5.25
208,509
5.93
294,807
6.23
297,968
5.96
58,452
5.12
150,798
7.19
142,113
8.21
117,502
8.43
456,316
10.25
201,169
6.21
106,573
7.89
4,311,950
6.81
EKS PPP
(FF/US$)*
via
Germany
7.04
7.27
15.54
6.06
6.22
6.39
8.92
3.18
5.82
4.45
5.30
6.22
6.60
6.01
5.12
7.70
7.54
8.37
9.83
6.34
7.51
Relative
price level
(PPP/
exch. rate)
1.21
1.25
2.66
1.04
1.07
1.10
1.53
0.54
1.00
0.76
0.91
1.07
1.13
1.03
0.88
1.32
1.29
1.43
1.68
1.09
1.29
6.78
1.16
Relative price spread in manufacturing
is more than 2:1
Relative Price Levels Manufacturing, 1997
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
JP NO DK AT SW AU UK NL LU DE FR FI BE KO US IR PO GR CA IT ES TA SK PL HU CZ
Derivation of PPPs in Retail Trade is now
consistent with commonly applied approach in
national accounts
FRANCE
Retail Sector
52 Retail trade
Retail trade (EKS PPP)
521 Non-specialized retail trade in stores
522 Retail sale of food, beverages and tobacco
in specialized stores
523 Retail sale of pharmaceutical and medical
goods, cosmetic and toilet articles
524 Other retail sales of new goods in
specialized stores
525 Retail sale of second-hand goods in stores
526 Retail sale not in stores
527 Repair of personal and household goods
* EKS PPP
Number
of
product
PPPs
Sales
E-PPP
219
Margin
in % of
sales
value
Purchase
PPP
derived from
margins
Margin
Fisher
PPP
(FF/US$)
1,732,709
1.02
874,026
0.80
28%
Sales
in
1997 mln
FFR
Relative
price level
(PPP/
exch. rate)
87
5.83
18%
6.42
6.00
5.98*
4.70
34
5.77
38%
4.93
7.61
77,192
1.30
5
5.47
32%
5.09
5.43
161,618
0.93
50
2
35
6
5.92
4.60
6.00
4.94
39%
50%
47%
70%
5.68
4.02
5.61
4.08
7.11
5.35
7.30
5.52
514,735
11,235
84,778
9,124
1.22
0.92
1.25
0.95
Relative Price Levels Trade Sector, 1997
2.5
2.0
1.5
1.0
0.5
JP SW NO UK AU GR IT AT TA FR KO DK FI US BE IR LU DE CA NL ES PO HU PL CZ SK
Table 4 Relative price levels for gross
output (US = 1), broad sectors, 1997
Industry
Agriculture
Mining
Manufacturing
Utilities
Construction
Trade
Transport and Communication
Financial and business services
Other services
Public services
Services sector average
ISIC rev.
3
01-05
10-14
15-37
40-41
45
50-55
60-64
65-74
90-95
75-85
50-95
average,
all
1.47
1.41
1.06
1.15
0.94
1.01
1.10
0.98
0.93
0.71
average,
low
1.34
1.29
0.83
0.91
0.58
0.79
0.86
0.62
0.56
0.42
average,
high
1.54
1.47
1.18
1.27
1.12
1.13
1.23
1.17
1.13
0.86
coef of
var, all
0.53
0.36
0.22
0.31
0.36
0.31
0.30
0.39
0.38
0.41
0.95
0.65
1.10
0.32
19
Conclusions and Next Steps
 An economy-wide application of industry PPPs is
now within sight
 Terms-of-Trade
 Net taxes on products
 Extension with input PPPs (intermediate inputs,
capital, labour)
 Extension to non-OECD countries
 New applications:
 EU KLEMS growth accounting and productivity
 Balassa-Samuelson hypothesis
 Price and productivity convergence
 Potential for replication of mixed approach for
historical comparisons
20