## _wp10253 - References

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---

### I. INTRODUCTION
- IMF use of PPP-adjusted GDP:
  - Used in World Economic Outlook (WEO) since 1993.
  - Used as an element in the formula to help guide decisions on the distribution of members’ quotas.
- Paper focus (PPP measurement issues salient to IMF usage):
  - country coverage and imputation of PPP estimates for non-participating members;
  - PPP estimates for non-benchmark years;
  - timeliness and periodicity of PPP estimates and updating mechanisms;
  - country groupings; and
  - transparency.
- Exclusions: measurement issues on weights and price surveys, sampling, data collection, validation, and aggregation methods (covered in ICP documentation, World Bank (2008)).

### II. INTERNATIONAL MONETARY FUND USE OF PPPS
- IMF uses PPPs:
  - as an element in the quota distribution formula (Section A);
  - in research and analysis including WEO, G-20 Surveillance Notes, Global Financial Stability Report, Regional Economic Outlook Reports, Staff Position Notes, Working Paper Series, and external publications.
- WEO reliance: much IMF research uses the WEO database which incorporates PPP adjustments.

### A. Quota Determination
- Role of quotas: determine financial resources members provide to the IMF, access limits, shares in general allocation of SDRs, and largely determine voting power.
- Key reform: On April 28, 2008, quota and voice reform included GDP calculated with PPP “exchange rates” in the IMF quota formula for the first time.
- Current quota formula composition:
  - weighted average of GDP (weight of 50 percent), openness (30 percent), variability (15 percent), and international reserves (5 percent);
  - GDP in formula is a blend of GDP based on market exchange rates (weight of 60 percent) and PPPs (40 percent);
  - Both market exchange and PPP GDP weights are an average of the last 3 years data: the 2008 data set requires GDP data for 2006–2008;
  - A compression factor of 0.95 is applied to the linear combination of the four variables to reduce dispersion of calculated quotas.
- Box 1 formula specification:
  - CQS = 0.5 Y + 0.3 O + 0.15 V + 0.05 R, multiplied by compression factor k = 0.95 and rescaled to sum to 100;
  - Definitions:
    - CQS = the calculated quota share;
    - Y = blend of GDP converted at market rates and PPPs averaged over a three year period (weights: 0.60 market-based and 0.4 PPP);
    - O = annual average of sum of current payments and current receipts (goods, services, income, and transfers) for a five year period;
    - V = variability of current receipts and net capital flows (measured as a standard deviation from the centered three-year trend over a thirteen year period);
    - R = twelve month average over a year of official reserves (foreign exchange, SDR holdings, reserve position in the IMF, and monetary gold);
    - k = compression factor of 0.95 (applied to uncompressed calculated quota shares then rescaled).
- Inclusion of PPP GDP and compression factor: recognized as difficult aspects and included for a period of 20 years pending review.
- Historical timing: membership endorsed modernization at IMF Annual Meetings in Singapore in September 2006; new formula basis for "second round" of quota reform agreed in April 2008.
- Selected changes in calculated quota shares (derived from calculated formulas only):
  - United States: Previous five formulas 16.284 → New formula 18.991 → difference 16.62
  - Japan: 7.011 → 8.032 → 14.56
  - Germany: 6.850 → 6.227 → -9.09
  - India: 1.287 → 1.997 → 55.17
  - Brazil: 1.069 → 1.725 → 61.37
  - Luxembourg: 1.369 → 0.624 → -54.42
  - Singapore: 1.929 → 1.031 → -46.55
  - Russia: 1.702 → 2.053 → 20.62
  - Mexico: 1.841 → 1.970 → 7.01
  - Note: listed economies are responsible in total for about 80 percent of world PPP GDP.
- Data enabling inclusion of PPP GDP: updated PPP GDP data from the ICP published in December 2007 reflecting substantial methodological and consistency improvements.
- Effects: inclusion of PPP GDP contributed to significant redistribution of calculated quota shares, increasing shares for many emerging and developing countries; other formula changes (raising GDP weight, reducing openness weight) also influenced outcomes.
- Boosts: emerging market and developing economies whose shares in global PPP GDP were substantially larger (by more than 75 percent) than their actual pre-Singapore quota shares received a minimum nominal quota increase, “boost,” of 40 percent; beneficiaries included Brazil, India, and Vietnam.

### B. Uses in the World Economic Outlook (WEO)
- WEO aggregations:
  - WEO aggregates (world, regional, analytic) are sums or weighted averages of country indicators; composites for domestic economy data are generally weighted by GDP country shares valued at PPP (nominal GDP divided by PPP exchange rate).
  - WEO PPP-based GDP used for quota calculations are taken from the WEO database and derived by dividing a country’s nominal GDP in its own currency by its PPP relative to the United States.
  - WEO PPP-based data are converted into SDR units using the SDR-U.S. dollar period average exchange rate.
- Data sources and extrapolation:
  - WEO PPPs are based on ICP data for 2003-05 published in December 2007 and were extended in the WEO database by using growth in relative GDP deflators (the GDP deflator of a country divided by the GDP deflator of the United States).
- Exceptions: PPP weighting exceptions occur for groups of economies for exchange rates, interest rates, growth rates of monetary aggregates, external economy indicators, unemployment rates and employment, and domestic economy for the Euro area (WEO April 2009, page 181).
- WEO reported values (Table A1 of the Statistical Appendix):
  - Estimated value of world output in 2009: 54,864 billion U.S. dollars at market exchange rates → 68,651 billion U.S. dollars at PPP.
  - Projected growth in world GDP volume between 2009 and 2014: 28.7 for GDP at market exchange rates compared with 30.2 percent at PPPs (WEO, April 2009, page 189).
  - Note: GDP growth rates for each country are identical whether exchange rates or PPPs are used; differences arise in country-shares used as weights.
- ICP benchmark rounds: occur approximately every 5 years (last in 2005); WEO updates weights between ICP rounds by growth in relative GDP (country’s GDP deflator divided by the United States’ GDP deflator), but this is not equivalent to data-rich country price comparisons of an ICP round.
- IFS use of PPP weights:
  - IFS uses PPP-based weights for some regional and global aggregates: global CPIs, PPIs/WPIs, GDP volume, GDP deflator, gross capital formation as a percentage of GDP, and final consumption expenditure as a percentage of GDP.
  - IFS PPP weights are updated and revised from the WEO about every five years for base years: 1953, 1958, 1963, 1970, 1975, 1980, 1984-86, 1990, 1995, 2000, and 2005.
  - Values of PPP weights for base years are used for subsequent intervening sub-periods; updates do not take effect immediately due to time lags in survey collection, compilation, and publication.
  - Most recent update referring to 2005 PPP weights was from the October 2008 WEO taking effect in IFS from May 2009 onwards.
  - Countries whose weights are not available from the WEO are excluded from the IFS aggregation process.

### III. SOME SALIENT PPP MEASUREMENT ISSUES FOR IMF USE
- Issues flagged for discussion: country coverage, imputation for non-participating members, non-benchmark year estimates, timeliness and periodicity/updating, country groupings, transparency. (Substantive text for Section III not fully supplied in source excerpt.)

### 12. Issues relating to the reliability of data used for PPP price comparisons and GDP

#### A. Country Coverage
- ICP rounds and participation:
  - Last survey-based ICP round: 2005; next planned: 2011.
  - Historical participation by number of countries in ICP rounds: 10 (1970), 16 (1973), 34 (1975), 60 (1980), 64 (1985), and 118 in 1993.
  - The 2005 ICP round covered 146 economies.
  - At least another 65 economies or territories did not participate in 2005.
  - IMF membership: 187 countries; IMF relied in part on an estimation routine for the PPP variable for 41 countries.
  - Notable geographic shortfalls in 2005: lack of PPP data from all countries of Central America and the Caribbean; participation of only 10 countries in South America.
- IMF concerns and objectives:
  - Increase number of participating countries in subsequent rounds. (World Bank expected 170 countries for the 2011 round.)
  - Ensure reliability and integrity of methods for estimating PPPs for non-participating economies.
- World Bank methodology for non-benchmark economies (as used by IMF/WDI):
  - Regression equations for price level indices (PLIs = PPP GDP relative to market exchange rate, normalized with the United States = 100) use explanatory variables including GDP per capita in U.S. dollars, imports and exports as shares of GDP (for GDP but not private consumption), ratio of dependents to working age population, dummy variables for Sub-Saharan African, OECD, island, and landlocked developing economies, and interaction terms for GDP per capita with these dummies.
- IMF value of PPP estimates for non-benchmark members:
  - Ready availability and independent derivation as part of the ICP program.
  - Importance of timely availability of estimates and methodology, and indication of countries that may have very wide prediction intervals.
  - Model specification for IMF usage might emphasize robustness to extreme prediction intervals, especially for larger non-benchmarked countries.

#### B. PPP Estimates for Non-Benchmark Years
- Nature of benchmark availability:
  - PPP benchmark survey-based weights are normally updated at about five-year intervals.
  - Extrapolation method used by IMF to produce annual PPPs:
    - Multiply the country’s last round’s PPP GDP estimates, relative to the U.S., by the country’s volume growth in GDP between the last round and the year in question.
    - Multiply the resulting volume-inflated measure by the U.S. inflation rate (GDP deflator) to provide an estimate in U.S. dollars.
    - Equivalent: take the country’s PPP relative to the U.S. in the benchmark year and extrapolate by the growth rate in the country’s GDP deflator relative to the growth rate in the U.S. GDP deflator.
    - Weights are calculated each year as nominal GDP in the national currency divided by the extrapolated PPP.
- Data limitations:
  - Many advanced economies compile annually chain-weighted volume GDP estimates, but many countries do not meet this requirement.
  - New ICP benchmark rounds act as benchmarks for extrapolated estimates; 2005 round replaced prior benchmarks often dating to 1993 or earlier for many emerging markets and developing countries.
- Revisions and impacts:
  - IMF's estimate for global growth in 2007 was revised down to 4.7 percent from 5.2 percent based on 2005 PPP results.
  - For 2007, China's share of global output revised to 10.9 percent (down from 15.8 percent).
  - For 2007, India's share revised to 4.6 percent (down from 6.4 percent).
- Sources of non-benchmark year PPP estimates: Penn World Tables (PWT), World Development Indicators (WDI), and WEO; each uses different methodologies.
- Research findings and concerns:
  - Serious inconsistencies across versions of PWT and inconsistencies between growth rates and per capita PPP GDP estimates (e.g., Johnson, Larson, Papageorgiou, and Subramanian (2009); Bhalla (2008)).
  - Major concern: growth rates used to derive non-benchmark year estimates are at domestic, not international (PPP), prices, and share weights of growth rates are at some hybrid of international and domestic prices.
  - Johnson et al. (2009) conclude that economic studies using annual data are generally not "safe" with respect to robustness to data revisions, except for countries with high quality data (generally OECD countries). PPP GDP level data are also not "safe" for cross-country comparisons in non-benchmark years.
  - Estimates for smaller countries show greater inconsistency between growth rates and per capita PPP GDP estimates, with variability increasing as data are farther from the benchmark round.
- Responses and proposals:
  - Need for more frequent ICP rounds and updates of PPP estimates.
  - Better integration of ICP methodology with CPI and PPI programs so PPP-relevant price data are regularly collected.
  - Possibility of "mini" ICP exercises between rounds (example: an Asia region mini-ICP underway to update to reference year 2009).
  - Need to improve estimation procedures for non-benchmark years (see Deaton and Heston (2008) and Johnson et al. (2009)).

#### C. Timeliness
- PPP estimates: based on inter-country price comparisons for 155 basic headings for the 2005 round.
- Timeliness priorities for IMF:
  - Minimize time lag between completion of price surveys and validation/compilation of regional and global PPPs.
  - Trade-off between reliability and timeliness: 2005 round final global results were published in December 2007.
  - Expectation for 2011 round results publication: February–June 2014.
- Logistical notes:
  - Not all countries and expenditure components have prices collected in the same period.
  - For 2011 round: household expenditure price surveys planned in 2011, some small Caribbean countries in 2012; price surveys for non-household goods and services scheduled from early 2011 to end of 2012.
  - A "mini" ICP for Asian region countries was being undertaken to update PPP estimates to a reference year of 2009.
- Additional timing issues:
  - Lag between component GDP expenditure data periods and price survey period.
  - Procedure to "update" GDP estimates to the benchmark year when timely ones are unavailable can affect harmonization with price surveys.
  - Need for estimates for non-participating countries and detailed information on their estimation procedures to quickly follow participating countries' releases.

#### D. Groupings of Economies
- ICP organization: regional basis — Africa; Asia and the Pacific; Commonwealth of Independent States; Latin America and the Caribbean; Western Asia; and OECD-EUROSTAT; regional aggregates published for these groups.
- Regional groupings relate to ICP sample design and do not necessarily correspond to UN regional aggregates or groupings used by other international organizations including the IMF.
- Mismatches examples:
  - Some countries (e.g., Georgia and Iran at time of writing) did not belong to any regional coordinating agency for the 2011 round.
  - Some countries (e.g., Chile, Egypt, Mexico, and Sudan) belonged to more than one regional group.
- IMF implication: since PPP estimates are provided for individual economies, differing regional groupings are not essential because IMF can aggregate country PPP GDP as it deems appropriate.

#### E. Large Economies
- (Heading present; no substantive text included in supplied content.)

### 25. Country-specific methodological issues (China and India)
- China:
  - Price collection for China was limited to 11 cities and their mainly urban surrounding areas.
  - Corrections were made to the figures to make them more geographically representative.
  - Deaton and Heston (2008) argue that the failure to include lower rural prices led to an overstatement of the PPP GDP deflator, suggested by the authors to be "by a little less than 10 percent."
- India:
  - India has a long tradition of collecting urban and rural prices.
- Other large developed economies:
  - Have smaller rural populations who to a large extent shop at urban outlets or chains.

### Transparency of PPP estimates and IMF reliance on ICP
- Importance:
  - PPP estimates used to guide decisions on distribution of members’ quotas, members’ financial obligations, allocation of general increase in SDRs, and voting power in IMF decisions.
  - Transparency required regarding how results are derived and disseminated.
- 2005 round practices:
  - Detailed Handbook of Methodology and Operational Manual published on ICP websites early into the program.
  - Methodological papers published as the round proceeded.
  - Quarterly ICP e-Newsletter published to inform users of developments and regional issues.
  - Each region produced a separate publication containing results and region-specific methodological issues.
  - Final results were published along with technical details—World Bank (2008).
- Planned for 2011 round: similar publications to the 2005 round.
- IMF reliance and integrity:
  - IMF relies on the professionalism of the ICP program for the GDP PPP estimates.
  - Integrity of PPP figures depends on careful collection of source data, compilation methods, and openness as to methods employed.

### Summary (Section IV)
- Role of PPP GDP estimates for the IMF:
  - PPP GDP estimates from the ICP are important to the IMF as an element of the formula guiding distribution of members’ quotas.
  - PPP-adjusted estimates are used in the WEO and are central to analysis and monitoring of output and other macroeconomic indicators across countries, and for regional, global, and analytic groups over time.
- IMF concerns and issues relevant to IMF usage:
  - Errors and bias in source data for PPP estimates and aggregation techniques should be minimized.
  - Specific issues include:
    - Country coverage and PPP estimates for member countries not participating in the ICP.
    - PPP estimates for non-benchmark years.
    - Timeliness and periodicity of PPP estimates.
    - Groupings of economies.
    - Transparency.
- Institutional involvement:
  - IMF staff serve on the ICP Executive Board and Technical Advisory Group.
  - IMF staff conduct research on PPP methodological issues (for example, Silver (2009)).

*Source: IMF working paper _wp10253 (excerpts provided in source PDF).*

### References        ......................................................................................................

### _wp10253 - References

### I. INTRODUCTION
- The IMF has used purchasing power parity (PPP)-adjusted Gross Domestic Product (GDP) measures in their World Economic Outlook (WEO) since 1993 and, more recently, as an element of the formula that is used to help guide decisions on the distribution of its members’ quotas.
- This paper outlines the IMF’s use of the International Comparison Program’s (ICP) PPP estimates and focuses on PPP measurement issues salient to IMF usage, including:
  - country coverage and imputation of PPP estimates for non-participating members;
  - PPP estimates for non-benchmark years;
  - timeliness and periodicity of PPP estimates and updating mechanisms;
  - country groupings; and
  - transparency.
- The paper does not cover other measurement issues (minimizing measurement errors and biases in weights and price surveys, sampling, data collection, validation, and aggregation methods), which are covered in ICP documentation, World Bank (2008).
- Section II outlines IMF use of PPP adjustments; Section III discusses PPP measurement issues of particular concern to IMF usage.

### II. INTERNATIONAL MONETARY FUND USE OF PPPS
- The IMF uses PPPs as:
  - an element in the formula used to help guide decisions on the distribution of members’ quotas (Section A), and
  - in research and analysis work, including WEO, G-20 Surveillance Notes, Global Financial Stability Report, Regional Economic Outlook Reports, Staff Position Notes, Working Paper Series, and external publications.
- Much IMF research relies on the WEO database, which incorporates PPP adjustments.

#### A. Quota Determination
- Quotas determine: financial resources members provide to the IMF, access limits, shares in general allocation of SDRs, and largely determine voting power.
- On April 28, 2008, a large-scale quota and voice reform was adopted that for the first time included GDP calculated with PPP ―exchange rates‖ as an argument in the IMF quota formula.
- Current quota formula composition:
  - weighted average of GDP (weight of 50 percent), openness (30 percent), variability (15 percent), and international reserves (5 percent);
  - GDP in formula is a blend of GDP based on market exchange rates (weight of 60 percent) and PPPs (40 percent);
  - Both market exchange and PPP GDP weights are an average of the last 3 years data: the 2008 data set requires GDP data for 2006–2008;
  - A compression factor of 0.95 is applied to the linear combination of the four variables to reduce dispersion of calculated quotas.
- Box 1 formula specification:
  - CQS = 0.5 Y + 0.3 O + 0.15 V + 0.05 R, multiplied by compression factor k = 0.95 and rescaled to sum to 100;
  - Definitions:
    - CQS = the calculated quota share;
    - Y = blend of GDP converted at market rates and PPPs averaged over a three year period (weights: 0.60 market-based and 0.4 PPP);
    - O = annual average of sum of current payments and current receipts (goods, services, income, and transfers) for a five year period;
    - V = variability of current receipts and net capital flows (measured as a standard deviation from the centered three-year trend over a thirteen year period);
    - R = twelve month average over a year of official reserves (foreign exchange, SDR holdings, reserve position in the IMF, and monetary gold);
    - k = compression factor of 0.95 (applied to uncompressed calculated quota shares then rescaled).
- The inclusion of PPP GDP and the compression factor were recognized as difficult aspects and were included for a period of 20 years pending review.
- Historical process: membership endorsed modernization at IMF Annual Meetings in Singapore in September 2006; the new formula was basis for "second round" of quota reform agreed in April 2008.
- Table 1 highlights changes in calculated quota shares (derived from calculated formulas only) for major economies (selected examples):
  - United States: Previous five formulas 16.284 → New formula 18.991 → difference 16.62
  - Japan: 7.011 → 8.032 → 14.56
  - Germany: 6.850 → 6.227 → -9.09
  - India: 1.287 → 1.997 → 55.17
  - Brazil: 1.069 → 1.725 → 61.37
  - Luxembourg: 1.369 → 0.624 → -54.42
  - Singapore: 1.929 → 1.031 → -46.55
  - Russia: 1.702 → 2.053 → 20.62
  - Mexico: 1.841 → 1.970 → 7.01
  - (Table notes that the listed quota shares are derived from the calculated formulas only and that the listed economies are responsible in total for about 80 percent of world PPP GDP.)
- Inclusion of PPP GDP in formula facilitated by updated PPP GDP data from the ICP published in December 2007, reflecting substantial methodological and consistency improvements; previously data quality issues impeded PPP GDP consideration.
- The inclusion of PPP GDP contributed to significant redistribution of calculated quota shares, increasing shares for many emerging and developing countries; other formula changes (raising GDP weight, reducing openness weight) also influenced outcomes.
- Boosts and ad hoc increases: emerging market and developing economies whose shares in global PPP GDP were substantially larger (by more than 75 percent) than their actual pre-Singapore quota shares received a minimum nominal quota increase, “boost,” of 40 percent; beneficiaries included Brazil, India, and Vietnam.

#### B. Uses in the World Economic Outlook (WEO)
- WEO aggregates (world, regional, analytic) are sums or weighted averages of country indicators; composites for domestic economy data are generally weighted by GDP country shares valued at PPP (nominal GDP divided by PPP exchange rate).
- WEO PPP-based GDP used for quota calculations are taken from the WEO database and derived by dividing a country’s nominal GDP in its own currency by its PPP relative to the United States.
- WEO PPP-based data are converted into SDR units using the SDR-U.S. dollar period average exchange rate.
- WEO PPPs are based on ICP data for 2003-05 published in December 2007 and were extended in the WEO database by using growth in relative GDP deflators (the GDP deflator of a country divided by the GDP deflator of the United States).
- Exceptions to PPP weighting occur for groups of economies for exchange rates, interest rates, growth rates of monetary aggregates, external economy indicators, unemployment rates and employment, and domestic economy for the Euro area (WEO April 2009, page 181).
- WEO reports alternative measures of world output using both PPP and market exchange rates (Table A1 of the Statistical Appendix):
  - Estimated value of world output in 2009: 54,864 billion U.S. dollars at market exchange rates → 68,651 billion U.S. dollars at PPP.
  - Projected growth in world GDP volume between 2009 and 2014: 28.7 for GDP at market exchange rates compared with 30.2 percent at PPPs (WEO, April 2009, page 189).
  - Note: GDP growth rates for each country are identical whether exchange rates or PPPs are used; differences arise in country-shares used as weights.
- ICP benchmark rounds occur approximately every 5 years (last in 2005); WEO updates weights between ICP rounds by growth in relative GDP (country’s GDP deflator divided by the United States’ GDP deflator), but this is not equivalent to data-rich country price comparisons of an ICP round.
- IFS use of PPP weights:
  - IFS uses PPP-based weights for some regional and global aggregates: global CPIs, PPIs/WPIs, GDP volume, GDP deflator, gross capital formation as a percentage of GDP, and final consumption expenditure as a percentage of GDP.
  - IFS PPP weights are updated and revised from the WEO about every five years for base years: 1953, 1958, 1963, 1970, 1975, 1980, 1984-86, 1990, 1995, 2000, and 2005.
  - Values of PPP weights for base years are used for subsequent intervening sub-periods; updates do not take effect immediately due to time lags in survey collection, compilation, and publication.
  - Most recent update referring to 2005 PPP weights was from the October 2008 WEO taking effect in IFS from May 2009 onwards.
  - Countries whose weights are not available from the WEO are excluded from the IFS aggregation process.

### III. SOME SALIENT PPP MEASUREMENT ISSUES FOR IMF USE
- The paper signals that Section III will discuss PPP measurement issues for IMF usage, including those foreshadowed in the Introduction (country coverage, imputation, non-benchmark year estimates, timeliness/periodicity/updating, country groupings, transparency), but the supplied content stops at the section heading and does not provide the substantive text of Section III.

*Source: IMF working paper _wp10253 (References and selected sections provided).*

### 12.      Issues relating to the reliability of data used for PPP price comparisons and GDP

### 12.      Issues relating to the reliability of data used for PPP price comparisons and GDP

### A. Country Coverage
- IMF usage of PPPs relies on estimates provided by the ICP, which are conducted periodically in "rounds" with "benchmark years."
- The last survey-based ICP round was conducted in 2005 and the next was planned for 2011.
- Historical participation by number of countries in ICP rounds: 10 (1970), 16 (1973), 34 (1975), 60 (1980), 64 (1985), and a landmark 118 in 1993.
- The 2005 ICP round covered 146 economies.
- At least another 65 economies or territories did not participate in 2005 for reasons including lack of resources or no national interest.
- The IMF, with membership of 187 countries, relied in part on an estimation routine for the PPP variable for 41 countries.
- Notable geographic shortfalls in 2005: lack of PPP data from all countries of Central America and the Caribbean; participation of only 10 countries in South America, mainly due to lack of resources.
- IMF concerns going forward:
  - Increase the number of participating countries in subsequent rounds. The World Bank expected 170 countries for the 2011 round.
  - Ensure reliability and integrity of methods for estimating PPPs for non-participating (non-benchmark) economies.
- World Bank methodology for estimating PPPs for non-benchmark economies (as used by IMF/WDI) is documented in Changqing and Swanson (2009).
  - Regression equations for price level indices (PLIs = PPP GDP relative to market exchange rate, normalized with the United States = 100) use explanatory variables including GDP per capita in U.S. dollars, imports and exports as shares of GDP (for GDP but not private consumption), ratio of dependents to working age population, dummy variables for Sub-Saharan African, OECD, island, and landlocked developing economies, and interaction terms for GDP per capita with these dummies.
- Value added to IMF of PPP estimates for non-benchmark members:
  - Ready availability and independent derivation as part of the ICP program.
  - Importance of timely availability of estimates and methodology, and indication of countries that may have very wide prediction intervals.
  - Model specification for IMF usage might emphasize robustness to extreme prediction intervals, especially for larger non-benchmarked countries.

### B. PPP Estimates for Non-Benchmark Years
- PPP GDP estimates based on ICP benchmark price surveys are available only periodically; the last benchmark rounds were in 2005 and 1993.
- PPP benchmark survey-based weights are normally updated at about five-year intervals.
- Extrapolation method used by IMF to produce annual PPPs:
  - Multiply the country’s last round’s PPP GDP estimates, relative to the U.S., by the country’s volume growth in GDP between the last round and the year in question.
  - Multiply the resulting volume-inflated measure by the U.S. inflation rate (GDP deflator) to provide an estimate in U.S. dollars.
  - Equivalent interpretation: take the country’s PPP relative to the U.S. in the benchmark year and extrapolate by the growth rate in the country’s GDP deflator relative to the growth rate in the U.S. GDP deflator.
  - Weights are calculated each year as nominal GDP in the national currency divided by the extrapolated PPP.
- Many advanced economies compile annually chain-weighted volume GDP estimates, but many countries do not meet this requirement.
- New ICP benchmark rounds act as benchmarks for extrapolated estimates; the 2005 round replaced prior benchmarks often dating to 1993 or earlier for many emerging markets and developing countries.
- Revisions from the 2005 round materially affected global GDP shares and growth estimates:
  - IMF's estimate for global growth in 2007 was revised down to 4.7 percent from 5.2 percent based on 2005 PPP results.
  - For 2007, China's share of global output revised to 10.9 percent (down from 15.8 percent).
  - For 2007, India's share revised to 4.6 percent (down from 6.4 percent).
- PPP GDP estimates for non-benchmark years are available in the Penn World Tables (PWT), World Development Indicators (WDI), and WEO; each uses different methodologies.
- Research findings and concerns:
  - Serious inconsistencies across versions of PWT and inconsistencies between growth rates and per capita PPP GDP estimates (e.g., Johnson, Larson, Papageorgiou, and Subramanian (2009); Bhalla (2008)).
  - Major concern: growth rates used to derive non-benchmark year estimates are at domestic, not international (PPP), prices, and share weights of growth rates are at some hybrid of international and domestic prices.
  - Johnson et al. (2009) conclude that economic studies using annual data are generally not "safe" with respect to robustness to data revisions, except for countries with high quality data (generally OECD countries). PPP GDP level data are also not "safe" for cross-country comparisons in non-benchmark years.
  - Estimates for smaller countries show greater inconsistency between growth rates and per capita PPP GDP estimates, with variability increasing as data are farther from the benchmark round.
- Despite deficiencies in extrapolated estimates, there is a case for their use since annual weighting based on estimates is preferable to assuming no change.
- Implications and proposed responses:
  - Need for more frequent ICP rounds and updates of PPP estimates.
  - Possibility of better integration of ICP methodology with CPI and PPI programs so PPP-relevant price data are regularly collected in routine national statistics compilation.
  - Possibility of "mini" ICP exercises between rounds (e.g., an Asia region mini-ICP underway to update to reference year 2009).
  - Also a need to improve estimation procedures for non-benchmark years (see Deaton and Heston (2008) and Johnson et al. (2009)).

### C. Timeliness
- PPP estimates are based on inter-country price comparisons for the basic headings of activities that comprise GDP: 155 basic headings for the 2005 round.
- Key timeliness aspects for IMF:
  - Minimize time lag between completion of price surveys and validation/compilation of regional and global PPPs.
  - Trade-off exists between reliability and timeliness of results. For 2005 round final global results were published in December 2007.
  - Expectation for 2011 round results publication: February–June 2014.
- Logistical notes:
  - Not all countries and expenditure components have prices collected in the same period.
  - For the 2011 round: plan was for household expenditure price surveys in 2011, but some small Caribbean countries were to have surveys in 2012; price surveys for non-household goods and services were scheduled from early 2011 to end of 2012.
  - A "mini" ICP for Asian region countries was being undertaken to update PPP estimates to a reference year of 2009.
- Additional timeliness issues:
  - Lag between the period(s) to which component GDP expenditure data relate and the price survey period. The 2005 round principally used price surveys conducted in 2005, though not all countries had 2005 expenditure estimates available for all GDP components.
  - The procedure used to "update" GDP estimates to 2005 when timely ones are unavailable can affect harmonization with price surveys.
  - Need for estimates for non-participating countries and detailed information on their estimation procedures to quickly follow participating countries' releases.

### D. Groupings of Economies
- ICP is organized and executed on a regional basis: Africa; Asia and the Pacific; Commonwealth of Independent States; Latin America and the Caribbean; Western Asia; and OECD-EUROSTAT, with regional aggregates published for these groups.
- ICP regional groupings relate to ICP sample design and do not necessarily correspond to standard UN regional aggregates, UN Regional Commissions member state groupings, or groupings used by other international organizations including the IMF.
- Examples of mismatches:
  - Some countries (e.g., Georgia and Iran at time of writing) did not belong to any regional coordinating agency for the 2011 round.
  - Some countries (e.g., Chile, Egypt, Mexico, and Sudan) belonged to more than one regional group.
- For IMF purposes, since PPP estimates are provided for individual economies, differing groupings are not essential because IMF can aggregate country PPP GDP in whichever manner it deems appropriate.

### E. Large Economies
- (Heading present in source; no substantive text for this subsection included in the supplied content.)

*Source: _wp10253 - 12.      Issues relating to the reliability of data used for PPP price comparisons and GDP*

### 25.      In the cases of large economies such as China and India, country-specific

### _wp10253 - 25.      In the cases of large economies such as China and India, country-specific

### Country-specific methodological issues (China and India)
- China
  - Price collection for China was limited to 11 cities and their mainly urban surrounding areas.
  - Corrections were made to the figures to make them more geographically representative.
  - Deaton and Heston (2008) argue that the failure to include lower rural prices led to an overstatement of the PPP GDP deflator, suggested by the authors to be "by a little less than 10 percent."
- India
  - India has a long tradition of collecting urban and rural prices.
- Other large developed economies
  - Have smaller rural populations who to a large extent shop at urban outlets or chains.

### Transparency of PPP estimates and IMF reliance on ICP
- Importance
  - PPP estimates are used to help guide decisions on the distribution of members’ quotas, members’ financial obligations, the allocation of a general increase in SDRs, and voting power in IMF decisions.
  - Transparency is required regarding how results are derived and disseminated.
- 2005 round practices
  - A detailed Handbook of Methodology and Operational Manual were published on the ICP websites early into the program.
  - Methodological papers were published as the round proceeded, mainly driven by members of the Technical Advisory Group and authors commissioned by the World Bank.
  - A quarterly ICP e-Newsletter was published to inform users of new developments and regional issues.
  - Each region produced a separate publication containing their results and region-specific methodological issues.
  - The final results were published along with technical details—World Bank (2008).
- Planned for 2011 round
  - Similar publications to the 2005 round are planned for the 2011 round.
- IMF reliance and integrity
  - The IMF relies on the professionalism of the ICP program for the GDP PPP estimates.
  - The integrity of PPP figures depends on careful collection of source data, compilation methods, and openness as to the methods employed.

### Summary (Section IV)
- Role of PPP GDP estimates for the IMF
  - PPP GDP estimates from the ICP are important to the IMF as an element of the formula that helps to guide decisions on the distribution of members’ quotas (see Section IIA).
  - PPP-adjusted estimates are used in the WEO and are central to analysis and monitoring of output and other key macroeconomic indicators across countries, and for regional, global, and analytic groups over time (see Section IIB).
- IMF concerns and issues relevant to IMF usage (raised in Section III)
  - Errors and bias in source data for the PPP estimates and aggregation techniques should be minimized.
  - Specific issues include:
    - Country coverage and PPP estimates for member countries not participating in the ICP.
    - PPP estimates for non-benchmark years.
    - Timeliness and periodicity of PPP estimates.
    - Groupings of economies.
    - Transparency.
- Institutional involvement
  - IMF staff serve on the ICP Executive Board and Technical Advisory Group.
  - Research on PPP methodological issues is also conducted by IMF staff (for example, Silver (2009)).

*IMF working paper content (excerpts provided in source PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10253.pdf_