Global Purchasing Power Parities and Real Expenditures - Afristat

Appendix HEstimation of Between-RegionLinking FactorsLinking Regions: A Step-by-StepNumerical ExampleA very important feature of the 2005 ICP was that PPPswere first computed separately for each region and theEurostat-OECD using methodology most suited to itseconomic situation and capabilities. The need to calibratethe regional PPPs to a common world currency led to thedevelopment of the ring methodology that was used to linkthe regions. The following paragraphs provide an exampleshowing the steps taken using ring prices to calibrate theregional PPPs to a common currency. The example showshow the ring prices for each region are converted to a commonregional currency using regional PPPs from whichregional PPPs are computed.Steps 1 and 2. This table shows ring prices for a basicheading with 10 products for the ring countries in regionsI, II, and III. The ring prices for each country are in itsnational currency. The bottom line of the table shows thewithin-region basic-heading PPP for each country relativeto the base country. (Note that countries A and E are thenumeraire countries in regions I and II, respectively.)Step 3. The ring prices for each country are divided byits regional PPP. This converts the ring prices in nationalcurrencies to the currency of the numeraire country for theregion. Note that the prices for the numeraire countriesremain the same.Step 4. This table shows the results of the CPD regressionon the three sets of prices shown in step 3. Region Iwas the numeraire for the CPD regression. For this basicheading, the PPP of region II to region I is 10.56.Step 5. This shows the linking factors by country byregion. Note that the linking factor for region I is 1.0. Thelinking factor for this basic heading in region II is 10.56.This is used for all countries in the region, not just the ringcountries.Step 6. The global PPP for each country is its withinregionPPP times the regional PPP or linking factor.An important feature is that the calibration of theregional PPPs to the global level is essentially a scalar adjustment.This preserves the relative relationships of the countrieswithin region; thus it meets the fixity requirement.195