Human Development Reports - United Nations Development Programme (UNDP)

What is the International Comparison Program (ICP)?

The ICP is one of the world’s largest statistical initiatives. It produces internationally comparable price levels, economic aggregates in real terms, and Purchasing Power Parity (PPP) estimates. The ICP Global Office, housed in the World Bank, manages the global program. National Statistical Offices implement the program on the ground, under the general guidance and coordination of regional agencies. The Global Office works in close collaboration with the OECD/Eurostat’s comparison program, and publishes global data linking ICP and OECD/ Eurostat results for 150 benchmark countries (of which 43 countries belong to the OECD/Eurostat region).

The program was first established in 1968 as a joint venture of the UN and the International Comparisons Unit of the University of Pennsylvania, with financial contributions from the Ford Foundation and the World Bank. Starting with a modest project to undertake comparisons in 10 countries in 1970, further ICP rounds have been conducted in 1975, 1980, 1985, 1990 (only partial), and 1993. By the last round, the ICP had expanded to the status of a truly global program. Coverage increased from the initial 10 countries in 1970 to 118 in 1993, covering all regions of the world for the first time. OECD, in collaboration with the Statistical Office of the European Union (Eurostat) has continued to collect price data to estimate PPPs in its member states and currently operates on a three-year cycle. Since 1993, the World Bank has assumed the role of global coordinator for the ICP in non-OECD countries.

How are PPPs calculated?

The PPP for GDP reflects the overall price level of the economy and is built up from item prices within smaller groups of expenditures that, in the terminology of the ICP, are referred to as basic headings. The requirements for basic headings are that:

• Expenditure weights can be estimated for each basic heading
• Items that belong to each basic heading comprise a homogenous group

Usually, the basic heading level is chosen on the basis that within a basic heading more detailed expenditure weights are not available. Usually the number of basic headings is around 150.

Within each basic heading, countries provide prices for individual items from a set of written specifications developed by the ICP over the years. Then prices of individual items within each basic heading are aggregated to produce price parities at the basic heading level.

The basic heading parities are all denominated in national currency units per unit of the numeraire currency. For example, if country A is the numeraire country, all basic heading PPPs for other countries will be expressed in terms of currency of country A.

Thus, the countries provide expenditures at the basic heading level and prices of items representing the corresponding basic heading. Then the countries’ data are amalgamated into regional comparisons. Finally, all regions are linked using inter-regional bridge countries into a single global comparison.

PPP vs Exchange Rates

Understanding the factors that affect levels of economic and social development in countries, and monitoring poverty reduction at the global level requires measures that convert indicators such as GDP and other economic statistics measured in national currencies, into a common accounting unit, typically the United States Dollar. Because market exchange rates are based on short-term factors and are subject to substantial distortions from speculative movements and government interventions, comparisons based on exchange rates, even when averaged over a period of time such as a year, yield unreliable and misleading results.

The problems associated with comparing indicators of social and economic development across countries have been known for some time, as have the shortcomings associated with the use of exchange rate conversion factors. Indeed it was the recognition of these problems by the international community in the sixties that first gave rise to the ICP, with a view to generating PPP data. By establishing purchasing power equivalence, where one dollar purchases the same quantity of goods and services in all countries, PPP conversions allow crosscountry comparisons of economic aggregates on the basis of physical levels of output, free of price and exchange rate distortions.

For example, relative US/EU/Japan position in terms of overall GDP has been subject to sharp oscillation when measured by exchange rate (see Table below):

Relative position of countries using exchange rate (EU 15 = 100)

Whereas the PPP converted figures exhibit much more gradual changes:

Relative position of countries using PPP rates (EU 15 = 100)

A similar picture is observed in other regions as well as on the global scale.

Some general sources:

1. ICP Handbook
Click here
2. ICP methodology and research
Click here
3. ICP Newsletters
Click here

Note: HD Insights are network members' contributions and do not necessarily represent the views of UNDP.