Calculating Approximate PPPs Using the Price Factor Method

Transcription

1 Iteratioal Compariso Program Calculatig Approximate PPPs Usig the Price Factor Method Global Office Operatioal Material

2 Table of Cotets 1. Pros ad cos of the Price Factor Method (PFM) From ex-factory prices to istalled, ready for use, prices Practical applicatio... 6 Ex-factory prices are ot available... 6 Movig from PPPs for specific types of equipmet goods to averages for all equipmet goods... 6 Some margis ca be igored Calculatig the adjustmet factor... 7 Aex 1.Reportig Form for the Price Factor Method (PFM)...9 2

3 CALCULATING APPROXIMATE PPPS ING THE PRICE FACTOR METHOD (PFM) 1. Pros ad cos of the Price Factor Method (PFM) The Stadard Method, which requires coutries to price specified products, is geerally accepted as the most accurate way to calculate PPPs for equipmet goods ad the alterative Price Factor Method described here is certaily iferior. However, the Stadard Method proved difficult for may coutries because the SPD/PSs referred to items that were ot commoly used i their coutries or because purchases of specific types of equipmet goods were sporadic so that it was difficult to get a realistic price for a piece of equipmet that may ot have bee purchased i a recet year. It is also expesive to collect prices for equipmet goods because atioal statistical offices do ot usually have the ecessary expertise i-house. Some have to hire equipmet experts to idetify the products specified i the SPD/PS or fid close substitutes if what was specified i the SPD/PS was ot available i their coutries. I some cases, outside experts also had to be cosulted to determie the price. The method described here is a fall-back solutio for coutries that do ot have the fiacial resources or expertise to use the Stadard Method. It is referred to as the Price Factor Method (PFM) because it ivolves the decompositio of the price of machiery ad equipmet ito its compoet price factors. As the coutries usig the PFM import almost all if their equipmet goods the PFM starts with the ex-factory price of a equipmet good i the exportig coutry ad follows it through to its fial price whe it is istalled ad ready to use o the importig coutry. Oe advatage of the PFM is that (approximate) PPPs are obtaied usig iformatio that is already available i may atioal statistical offices. Coutries that have a iput-output or supply ad use table eve if it ot very recet will have estimates of the margis ad other costs that are required by the PFM. This is also the case for coutries that use a commodity flow method for estimatig gross fixed capital formatio. For these reasos PFM is a attractive alterative for coutries with limited resources. 2. From ex-factory prices to istalled, ready for use, prices Usig the Stadard Method, PPPs are obtaied from the ratios of the prices of particular types of equipmet goods istalled ad ready for use at the producig establishmets i each coutry. For a imported equipmet good, this price ca be broke dow ito the ex-factory price of the good ad a series of costs, or margis that the purchaser icurs to brig it from where it was produced to where it will be used i productio. These margis are show i Table 1 below. They cosist essetially of trasport ad trade margis, customs duties ad other taxes ad, except for trasport equipmet, istallatio costs. 3

4 Table 1. Compoets of the price of a imported equipmet good whe it is istalled ad ready for use i the importig coutry equals equals equals Ex-factory price i exportig coutry Surcharge less discout for coutry or regio Product taxes less subsidies i exportig coutry Trade margi i exportig coutry Trasport withi the exportig coutry Wharfage (fee for usig the wharf) i exportig coutry Fee for customs documetatio i exportig coutry F.o.b. (Free o Board) price i exportig coutry Iteratioal freight Isurace costs C.i.f.(cost, isurace, freight)price i importig coutry Fee for customs documetatio i importig coutry Customs duty i importig coutry Wharfage (fee for usig the wharf) i importig coutry Product taxes less subsidies i importig coutry Trade margis i importig coutry Trasport withi importig coutry Istallatio costs at the purchaser s establishmet Istalled, ready-to-use price i importig coutry Cosider two coutries, A ad B, which import a particular kid of equipmet good from the same producer. If all the margis icurred by coutries A ad B are expressed i a commo currecy say dollars - the: P P A B XR A ( F a1 a2... a ).. (1), XR ( F b b... b ) B 1 2 where: P A ad PB are the istalled, ready to use prices of the machie i coutries A ad B, both expressed i their atioal currecies; XR A ad XR B are the umber of uits of A s ad B s currecy that ca be purchased for oe dollar; F is the ex-factory price of the machie i dollars; 4

5 a... 1 are the margis i dollars icurred by the importer i coutry A both i the exportig coutry ad i coutry A itself; ad b... 1 are the margis i dollars icurred by the importer i coutry B both i the exportig coutry ad i coutry B itself. Sice PA is the bilateral purchasig power parity for the machie i questio, with B as the base P B coutry, ad sice ca be writte as XR XR is the exchage rate betwee coutries A ad B. Equatio (1) A B PPP A / B XR A / B ( F a1 a2... a ). (2), ( F b b... b ) 1 2 where: PPP A/B is the bilateral PPP usig B as the base coutry; ad XR A/B is the exchage rate betwee coutries A ad B, specifically the umber of uits of currecy A that ca be purchased by oe uit of currecy B. If the a s ad b s are coverted to ratios of the ex-factory price ad are deoted by s ad s, equatio (2) ca be writte as PPP or: A / B PPP A XR / B i1 XR A / B ( F F i ) i1 (3), F F A / B 1 1 i1 i1 i i.. (4). i The term i brackets i (4) ca be see as a adjustmet factor required i order for the exchage rate betwee coutries A ad B to equal the PPP. It is oe the sum of the margis paid i oe coutry divided by oe the sum of the margis paid i the other. These margis are the various items listed i Table 1 expressed as ratios of the ex-factory price. 5

6 3. Practical applicatio Data limitatios require three modificatios to the formulatio of the ideal PFM give i (4) above. Ex-factory prices are ot available The adjustmet factor i equatio (4) requires kowledge of the ex-factory price of the piece of equipmet i the exportig coutry. I practice however, statistical offices i importig coutries do ot have iformatio o ex-factory prices - or will they usually have ay iformatio o the costs or margis icurred i the exportig coutry up to the poit where the goods are delivered to the poit from which they are beig exported. I practice therefore, it will be ecessary to covert the costs or margis to ratios of some other price that is likely to be similar i the coutries cocered eve if it is ot idetical. The best choice would be the f.o.b. price i the exportig coutry but most coutries record their imports at c.i.f. values, that is icludig freight ad isurace costs to brig the goods to the port of etry. It is here suggested that the c.i.f. values of imported machiery ad equipmet are coverted to a approximate f.o.b. basis usig the ratio of total iteratioal isurace ad freight charges to total merchadise imports. Movig from PPPs for specific types of equipmet goods to averages for all equipmet goods The discussio above has dealt with a specific equipmet good imported from a specific producer i a exportig coutry. However it is here proposed that exchage rates be adjusted to approximate PPPs for two broad groups of equipmet goods imported from all sources. The two groups are Metal Products ad Equipmet ( ) ad Trasport Equipmet ( ). This meas that the various margis used for the adjustmet factor i equatio (4) will ot be the costs that are icurred for importig a specific type of equipmet ad machiery from a particular coutry but averages for all of the two types of equipmet goods from whatever coutry they are imported. For example, the trasport margis must be the average margis charged o trasportig Metal Products ad Equipmet as a whole ad Trasport Equipmet as a whole from the port of arrival to the place where they are to be used; the customs margi must be the average rate charged o imported Metal Products ad Equipmet as a whole ad o imported Trasport Equipmet as a whole. Some margis ca be igored. Several of the margis listed i Table 1 may be zero or small relative to the iitial ex-factory price ad ca be igored. I additio, statisticias i the importig coutries will ot be able to estimate the costs that are icurred i the exportig coutry. The costs ad margis that are likely to be relatively large ad which coutries could reasoably be expected to report are as follows. 1. Customs duties 2. No-deductible VAT ad other taxes o products 6

7 3. Trasport costs i the importig coutry 4. Wholesale ad retail trade margis i the importig coutry 5. Istallatio costs Coutries are also required to provide the c.i.f. values of imports of the two Groups of equipmet goods, the c.i.f. value of total merchadise imports ad the isurace ad freight costs of total merchadise imports. Aex 1 cotais a reportig form to collect these 8 items for the two Groups of equipmet goods Metal Products ad Equipmet ad Trasport Equipmet. 4. Calculatig the adjustmet factor The iformatio collected o the reportig form i Aex 1 ca be used by the Regioal 1 i Coordiators to calculate a approximate versio of the adjustmet factor i1 ad 1 i i1 multiply it by the exchage rate to get a approximate PPP. The four steps are as follows: Step 1: The reported c.i.f. value of imports of each of the two Groups of equipmet goods is coverted to a approximate f.o.b. value usig the ratio of total iteratioal isurace ad freight to the c.i.f. value of total merchadise imports. This f.o.b. value is used as the closest practical approximatio to the ex-factory values which should, i priciple, be used as the basis for calculatig the ratios i the adjustmet factor. Step 2: Each of the followig items is calculated as a ratio of the (approximate) f.o.b. value of imported equipmet goods. : customs duties; o-deductible value added taxes ad other taxes o products; trasport costs i the importig coutry; retail ad wholesale trade margis i the importig coutry; istallatio costs. The calculatios are made separately for Metal Products ad Machiery ad Trasport Equipmet. These ratios are summed for each coutry to obtai 1 i for coutry A; 1 i for coutry B; ad so o for all the coutries i the regio for which the PFM is beig used. Step 3: The exchage rates betwee each pair of coutries are the multiplied by the relevat adjustmet factor to obtai pairs of bilateral PPPs for Metal Products ad Machiery ad Trasport Equipmet. Step 4: These bilateral PPPs are made trasitive by the EKS procedure. i1 i1 7

8 Box 1 is a worked example showig the calculatios for steps 1, 2 ad 3.of the adjustmet procedure for two coutries. As oly two coutries are ivolved i this example, Step 4 is ot required although whe the PFM is used by more tha two coutries their PPPs obtaied by the PFM will have to be made trasitive by the EKS procedure. Box 1. Worked Example for Imported Metal Products ad Machiery Coutry A - all values i atioal currecy Coutry B - all values i atioal currecy C.i.f. value of imports of Metal Products Ad Machiery Customs duties No-deductible value added taxes ad other taxes o products Trasport costs Retail ad wholesale trade margis Istallatio costs C.i.f. value of all merchadise imports Isurace ad freight o all merchadise imports Uits of local currecy per Dollar Step 1 Covert c.i.f. value of imports of Metal Products ad Machiery to approximate f.o.b. values Coutry A: x (1- (800/75 000)) = Coutry B: x (1- (3 000/ ) = Step 2 Calculate total of margis as ratios of approximate f.o.b. values Coutry A: ( )/2 968 = Coutry B: ( ) = Step 3 Adjust exchage rates to approximate bilateral PPPs Coutry A: Exchage rate A/B = 35/75 = Therefore PPP:A/B = x ( )/( ) = Coutry B: Exchage rate B/A = 75/35 = Therefore PPP:B/A = x ( )/( ) = I this worked example, the margis show i the first part of the worksheet are geerally higher i coutry A tha i coutry B. As a result, the PPP for coutry A is higher tha its exchage rate while the PPP for coutry B is lower tha its exchage rate. If the exchage rates had bee used istead of the PPPs, the volume of equipmet goods i coutry A would have bee overestimated while the volume of equipmet goods i coutry B would have bee uder-estimated. 8

9 Aex 1. Reportig Form for the Price Factor Method (PFM) The reportig form for coutries to implemet the PFM asks for oly the costs ad margis that are likely to be relatively large ad which coutries could reasoably be expected to report. Reportig form for Price Factor Method (PFM) Coutry Currecy uit Year Lie o. Descriptio 1 C.i.f. value of imports of equipmet goods 2 Customs duties 3 No-deductible VAT ad other taxes o products: either amout or percetage of lie 1 4 Trasport costs i the importig coutry either amout or percetage of lie 1 5 Wholesale ad retail trade margis i the importig coutry either amout or percetage of lie 1 6 Istallatio costs either amout or percetage of lie 1 7 Memoradum items Total imports of goods i c.i.f. values Total isurace ad freight o all imports of goods, icludig those provided by residets as well as oresidets. Metal products ad equipmet (Group ) Trasport equipmet (Group ) Reportig form completed by: Positio: address: Telephoe: Postal address: 9

10 Explaatory otes Lie 1. C.i.f. value of imports of equipmet goods The c.i.f. price (i.e. cost, isurace ad freight) is the price of a good delivered at the frotier of the importig coutry, icludig ay isurace ad freight charges icurred to that poit but before the paymet of ay customs duties or other taxes o imports or trade ad trasport margis withi the importig coutry. C.i.f. is the stadard method for valuig merchadise imports so that the c.i.f. value of imported equipmet goods ca be obtaied directly from the regular statistics o iteratioal merchadise trade. The imports to be icluded here are those that form part of Gross Fixed Capital Formatio (GFCF). Goods that form part of GFCF i equipmet goods ca be idetified usig either the SITC (Stadard Iteratioal Trade Classificatio) or the HS (Harmoised System) classificatios of merchadise trade. A few goods, such as motor vehicles ad persoal computers are imported both for capital formatio ad for fial cosumptio by govermet or households. Imports for fial cosumptio should be excluded. Coutries that use some versio of the commodity flow method for estimatig GFCF will already have a key for assigig codes to GFCF or fial cosumptio. Note that o breakdow is called for beyod the Group level of the ICP Expediture Classificatio. This reportig form asks oly for figures i respect of total Metal Products ad Machiery ad total Trasport Equipmet. Lie 2. Customs duties The amout show here should be customs duties due o imports although amouts actually paid will usually be a good approximatio ad ca be reported here. There are two ways i which this item ca be estimated either from records of customs duties collected or by applyig the rates of customs duties to the c.i.f. values of imports: Most customs authorities classify their receipts accordig to the Harmoised System. The amouts collected o equipmet goods ca therefore be obtaied by idetifyig the relevat HS codes. As oted above it is ecessary to distiguish duties collected o goods for GFCF from those collected o goods for fial cosumptio expediture. The mai problem here will affect motor vehicles, computers, had-tools ad metal furiture. If a sigle rate of customs duty is charged for all imports of ivestmet goods, this item ca easily be estimated by applyig that rate to the value of imports show i the lie 1. If differet rates apply to differet types of equipmet goods or to imports from differet coutries, it will be ecessary to calculate a weighted average of these rates usig the c.i.f. values of the relevat imports as weights. Lie 3. No-deductible value added taxes ad other taxes o products The amout show here is the total amout of value added taxes, sales taxes or other product taxes paid by the fial purchaser of the imported item of equipmet goods. I some coutries VAT ad other product taxes are reimbursed or ot charged o goods for GFCF. I such cases there will be o etry i this item. 10

11 Lie 4. Trasport costs i the importig coutry These are the costs of trasportig equipmet goods from where they eter the coutry to the establishmet of the purchaser. May coutries may have iformatio o trasport costs from a iput-output or supply ad use table. Other coutries use some form of the commodity flow method to estimate GFCF i equipmet goods. Use of this approach requires estimates of trasport costs for equipmet goods. Other coutries will eed to estimate the average distace over which imported equipmet goods are carried from their poit of arrival to the mai idustrial cetres. They will also eed estimates of freight rates per to-kilometre ad the toage of equipmet goods trasported. Lie 5. Retail ad wholesale trade margis i the importig coutry No distictio is made betwee wholesale ad retail margis. Trade margis are the gross output of retail ad wholesale eterprises. Imported goods are usually traded by large corporate eterprises which will keep stadard accoutig records. Iput-output ad supply ad use tables are aother possible source for some coutries. Lie 6. Istallatio costs There are usually o istallatio costs for Trasport Equipmet. For Metal Products ad Machiery the costs of istallatio should iclude all costs of puttig the item i place, coectig it to the power source, calibratig ad ruig i the equipmet good so that it is fuctioig correctly. Coutries that use some form of the commodity flow method to estimate GFCF i equipmet goods will already have estimates of these costs. Lie 7. C.i.f. value of imports of goods ad iteratioal isurace ad freight o all imports of goods. This memoradum item asks for the c.i.f. value of total imports of goods ad total costs of iteratioal freight ad isurace. The first item should be readily available from merchadise trade statistics. The balace of paymets will give the value of isurace ad trasport services provided by oresidet isurace ad trasport compaies. I may coutries all, or mostly all, iteratioal freight ad isurace is provided by o-residet compaies. I some coutries however, it will be ecessary to estimate isurace ad freight services provided by residet compaies. I the SNA Supply ad Use Table, total iteratioal isurace ad freight is oe of the adjustmet items i the supply matrix. 11