Comparative Price Levels Of Consumer Goods And Services

Monday, June 25, 2012

Comparative Price Levels Of Consumer Goods And Services

English: Various Euro bills. (Photo credit: Wikipedia)

This article highlights the different prices for consumer goods and services in the European Union (EU), looking at price level indices (PLIs), which provide a comparison of countries' price levels relative to the EU average and are calculated using purchasing power parities. It also provides an indication of the degree of price convergence in the EU Member States and considers price levels in the three EFTA countries (Iceland, Norway, and Switzerland), the acceding state Croatia, four EU candidate countries (Montenegro, the former Yugoslav Republic of Macedonia, Serbia and Turkey) and two potential candidate countries(Albania, Bosnia and Herzegovina).

Figure 1: Price level index for household final consumption expenditure (HFCE), 2011, EU-27=100

Table 1: Price level index for 4 groups of goods and services, 2011, EU-27=100 - Source: Eurostat (prc_ppp_ind)

Table 2: Price level index for 4 groups of goods and services, 2011, EU-27=100 - Source: Eurostat (prc_ppp_ind)

Table 3: Price level index for 4 groups of goods and services, 2011, EU-27=100 - Source: Eurostat (prc_ppp_ind)

Figure 2: Price convergence - variation coefficient of price level indices of final household consumption expenditure, 1995-2011
Source: Eurostat ( (prc_ppp_ind))

In 2011, price levels for consumer goods and services differed widely across Europe. Among EU Member States, in Denmark consumer prices were 42 % higher than the average of the 27 EU Member States, while the cheapest country was Bulgaria (49 % below the average). If the price level index is higher than 100, the country concerned may be considered to be relatively expensive compared with the EU average and conversely, if the price level index is lower than 100, then the country is relatively cheap compared with the EU average.

An understanding of the differences in price levels is important in the comparison of economic data, such as gross domestic product, because higher relative prices could make an economy look healthier than it really is. Observing price level differences is also important in the analysis of the development of the EU'ssingle market for goods and services.

Main statistical findings

Figure 1 shows the price level indices (PLIs) for total household final consumption expenditure (HFCE) on goods and services in 2011. Switzerland and Northern European countries tend consistently to have the highest prices, while south-eastern European countries show the lowest prices.

Food, beverages, tobacco, clothing and footwear

Table 1 shows the PLIs for four important groups of consumer goods and services (see below for a description of the content of each product group):

food and non-alcoholic beverages;
alcoholic beverages and tobacco;
clothing;
footwear.

These four groups represent on average 19 %, 5 %, 4 % and 1 % of household expenditure, respectively. For reference, the PLIs of total HFCE (those of figure 1) are also shown.

The shaded fields indicate the highest and lowest PLIs per product group among all 37 participating countries. The highest and lowest PLIs among the 27 EU Member States are marked in bold.

At the bottom of the table, variation coefficients are provided for the euro area(EA-17), the pre-2004 EU Member States (EU-15), the EU as it is now (EU-27) and the group of all 37 countries participating in the programme (All 37).

The variation coefficient is defined as thestandard deviation of the PLIs of the respective group of countries as a percentage of their average PLI. The higher the variation coefficient for a given product group, the higher the price dispersion across countries.

The most expensive country for all product groups except for clothing is Norway. Amongst the EU Member States, Denmark is the most expensive for food and non-alcoholic beverages, while Ireland has the highest PLI for alcoholic beverages and tobacco. The highest prices for clothing and footwear in the EU are reported in Sweden.

The former Yugoslav Republic of Macedonia shows the lowest price level of all 37 countries for food, beverages and tobacco, while Turkey is the cheapest of the participating countries for clothing and footwear. Within the EU Member States Bulgaria is the least expensive country for these product categories except for alcoholic beverages and tobacco, for which the lowest price level was found in Hungary.

The highest price dispersion is found for alcoholic beverages and tobacco. This is mainly due to large differences in taxation on these products across the 37 countries. Much less dispersion is apparent in the prices of clothing and footwear.

Price dispersion is naturally greatest within the 37-country group, which includes both the high price EFTA countries and the (mostly) low price candidate countries.

Energy, furniture, household appliances and consumer electronics

Table 2 shows the PLIs for another four groups of goods and services (see below for a description of the content of these groups):

energy (electricity, gas and other fuels);
furniture;
household appliances;
consumer electronics.

These groups represent on average 5 %, 2 %, 1 % and 1 % of household final consumption expenditure, respectively.

Price dispersion varies significantly between these four product groups, being most pronounced for electricity, gas and other fuels. Here, Denmark is by far the most expensive and Serbia the least expensive of all 37 participating countries, while Romania is the cheapest EU Member State.

For other three categories shown in this table the price dispersion is much lower – especially for consumer electronics.

Norway and UK show the highest price level for furniture and furnishings, and Bulgaria the lowest. For household appliances and consumer electronics Malta is the most expensive country among EU Member States and Iceland among all 37 countries. This may be due to the geographical position of both island countries (leading to higher transportation costs) and the small size of their internal markets.

The lowest prices for consumer electronics are reported in Poland, which is also the least expensive EU Member State in the category household appliances. However, among all 37 countries, the lowest price level for this product group is found in the former Yugoslav Republic of Macedonia.

Personal transport equipment, transport services, communication, restaurants and hotels

Table 3 shows the PLIs for another four groups of goods and services:

personal transport equipment;
transport services;
communication (services and equipment);
restaurants and hotels.

These groups represent on average 3 %, 3 %, 3 % and 8 % of household final consumption expenditure, respectively.

Price dispersion for personal transport equipment is not very significant and among all 37 countries Denmark and Norway stand out with very high PLIs for this category. This is due to high taxation levels on cars in these countries. The lowest prices were found in Bulgaria, but these are only 17 % below the EU average, demonstrating the relative closeness of prices for personal transport equipment among the other 35 countries.

Price dispersion is significantly higher among the three service categories (transport services, communication as well as restaurants and hotels). In general, prices for services tend to show larger differences across countries than prices for goods, due to the higher share of labour input into services and the high dispersion of wages across countries.

Concerning transport services, Norway shows the highest PLIs among all countries and among EU Member States Sweden and Finland report the highest prices. The lowest PLI levels are observed in Bulgaria and Romania among the EU Member States and Albania among all countries.

The highest and lowest PLIs for communication can be observed in Spain and Serbia among all 37 countries, while Lithuania is the cheapest EU Member State.

Finally, Norway stands out with the most expensive restaurants and hotels, while the lowest prices for these services are observed in the former Yugoslav Republic of Macedonia. Among the EU Member States, these positions were taken by Denmark and Bulgaria respectively.

Price convergence

Figure 2 shows the development over time of the variation coefficient of the PLI for total household final consumption expenditure for four country groups. A decrease of the variation coefficient is an indication of price convergence. It can be seen that between 1995 and 2008 there was a clear decrease of the variation coefficient for the group of 27 Member States, however since 2008 there has been a slight increase in this indicator.

On the other hand, for the group of EU15 Member States the variation coefficient remains fairly stable.

Within the euro area (EA17), the variation coefficient decreased in the early years, then was relatively stable between 1999 and 2003, and has continued to decrease to a lesser extent since 2004.

Data for the group of all 37 countries are only available from 2005 onwards, but give an indication of a slight price divergence since 2008. This can however be partly explained by the impact of exchange rate fluctuations.

Data sources and availability

The full methodology used in the Eurostat-OECD Purchasing Power Parities (PPP) programme is described in the Eurostat-OECD Methodological manual on purchasing power parities which is available free of charge from the Eurostat website.

The PPP concept

In their simplest form, PPPs are price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. For example, if the price of a hamburger in France is EUR 2.84 and in the United Kingdom it is GBP 2.20, the PPP for hamburgers between France and the United Kingdom is EUR 2.84 to GBP 2.20, or EUR 1.29 to the pound. In other words, for every pound spent on hamburgers in the United Kingdom, EUR 1.29 would have to be spent in France in order to obtain the same quantity and quality – or volume – of hamburgers.

Published PPPs, usually refer to product groups or broad aggregates like gross domestic product (GDP) rather than to individual products. However, these aggregate PPPs are based on sample surveys of individual goods and services.

Price level indices

The results of these surveys are expressed in the form of price level indices (PLIs). PLIs are the ratios of PPPs to exchange rates. They provide a comparison of countries' price levels relative to the European Union average: If the price level index is higher than 100, the country concerned is relatively expensive compared to the EU average, while if the price level index is lower than 100, then the country is relatively cheap compared to the EU average. The EU average is calculated as the weighted average of the national PLIs, weighted with expenditures from national accounts.

Price level indices are not intended to rank countries strictly. In fact, they only provide an indication of the order of magnitude of the price level in one country in relation to others, particularly when countries are clustered around a very narrow range of outcomes. The degree of uncertainty associated with the basic price data and the methods used for compiling PPPs, may affect in such a case the minor differences between the PLIs and result in differences in ranking which are not statistically or economically significant.

Organisation

Within the framework of the Eurostat-OECD PPP programme, surveys on prices of household goods and services are carried out cyclically by the national statistical institutes (NSIs) of 37 countries: The 27 EU Member States, three EFTA countries (Iceland, Norway and Switzerland), four candidate countries (Montenegro, the former Yugoslav Republic of Macedonia, Serbia and Turkey), and potential candidate countries (Albania, Bosnia and Herzegovina). Each survey cycle comprises six surveys, each related to a particular group of household consumption products. As two surveys are carried out per year, the whole survey cycle takes three years to complete, before the next cycle starts.

The PLIs in this article are thus based on price data collected in 2009, 2010 and 2011. The prices collected in 2009 and 2010 have been updated to 2011 using detailed consumer price indices. The PLIs are based on annual national average prices for in total more than 2400 goods and services. The expenditure shares are based on national accounts data for 2010 and represent the average over all participating countries. The national accounts data are also used as weights in the aggregation of detailed PLIs to aggregate PLIs such as for household final consumption expenditure.

Definition of the product groups

The product groups discussed in this article can be broadly described as follows.

Food and non-alcoholic beverages: bread and cereals; meat; fish; milk; cheese; eggs; oils and fats; fruits; vegetables; potatoes; other food; non-alcoholic beverages.
Alcoholic beverages and tobacco: spirits; wine; beer; tobacco; and narcotics.
Clothing: clothing materials; men's, women's, children’s and infant’s clothing; other articles of clothing and clothing accessories (excludes cleaning, repair and hire of clothing).
Footwear: men's, women's, children's and infants' footwear (excludes repair and hire of footwear).
Electricity, gas and other fuels: electricity; gas; liquid fuels; solid fuels; and heat energy (all for domestic use).
Furniture and furnishing, carpets and other floor coverings: kitchen furniture; bedroom furniture; living-room and dining-room furniture; other furniture and furnishings; carpets and other floor coverings (excludes repair of furniture, furnishings and floor coverings).
Household appliances: refrigerators and freezers; washing machines; dishwashers; cookers; microwave ovens; vacuum cleaners; coffee makers; kettles; toasters, etc. (excludes repair of household appliances).
Consumer electronics: televisions; DVD players; receivers; audio systems; MP3 players; cameras; camcorders; desktop and laptop computers; monitors; printers; scanners; software; music CDs; movie DVDs; empty CDs and DVDs etc (excludes repair of such equipment).
Personal transport equipment: motor cars; motor cycles and bicycles (excludes maintenance and repair of personal transport equipment, spare parts and fuels).
Transport services: Passenger transport by railway, by road, by air, by sea and inland waterway and other purchased transport services (e.g. left luggage services, removal services).
Communication: postal services; telephone and telefax equipment; telephone and telefax services.
Restaurants and hotels: restaurants; cafés; pubs; bars; canteens; hotels; youth hostels etc..

Context

Purchasing power parities (PPPs) are indicators of price level differences across countries. PPPs tell us how many currency units a given quantity of goods and services costs in different countries. PPPs can thus be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency, the purchasing power standard (PPS), eliminating the effect of price level differences across countries.

The main use of PPPs is to convert national accounts aggregates, like the gross domestic product (GDP) of different countries, into comparable volume aggregates. Applying nominal exchange rates in this process would overestimate the GDP of countries with high price levels relative to countries with low price levels. The use of PPPs ensures that the GDP of all countries is valued at a uniform price level and thus reflects only differences in the actual volume of the economy.

PPPs are also applied in analyses of relative price levels across countries. For this purpose, the PPPs are divided by the current nominal exchange rate to obtain a price level index (PLI) which expresses the price level of a given country relative to another, or relative to a group of countries like the EU-27.

The common rules for the provision of input data, and for the calculation and dissemination of PPPs, are laid down in Regulation 1445/2007 of 11 December 2007.
Source: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Comparative_price_levels_of_consumer_goods_and_services#