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Theoretical Characteristics of the Purchasing Power Parity in the EU Context

Constantin Anghelache (), Andreea–Ioana Marinescu () and Tudor Samson ()

International Journal of Academic Research in Accounting, Finance and Management Sciences, 2018, vol. 8, issue 2, 37-47

Abstract: This article focuses on highlighting the main significant elements of international comparability. Until now, gross domestic product and, in particular, gross domestic product per capita are benchmarks to be used in international comparisons. However, even if we are deflating the macroeconomic indicators of results, in total and in terms of the assessment of the living standards of the population in a group of countries, it is somewhat distorted by other macroeconomic indicators that differ from one country to another. Thus, the issue of the consumer price index or the harmonized price index gives a whole new perspective on the living standards of the population in a country. From this point of view, the most relevant indicator that accurately expresses this level (standard) of living in a country compared to another country is the parity of purchasing power. The introduction of the euro in the European Union involves going through some interesting stages and that is why we must point out that not all the Member States of the European Union are also members of the monetary union. Thus, it is a question of comparing the countries within the European Union, but also of expanding the comparison outside the monetary union or other countries. The purchasing power parity idea is sometimes reduced to the standard purchasing power parity (SPC) that is specific to the achievement of international comparability of the gross domestic product, both on its totality and on its main structures. Purchasing power parity calculations are performed in several steps such as the initial parity referring to a single country, then the value of the standard parities by recalculation as a geometric mean, then the recalculation based on the standard parities where factor conversion and last but not least, to divide the values obtained at the time expressed in the national value of a country. This is why this is an interesting process that the authors have been preoccupied with to decipher and present it with precision in this study. Furthermore, the authors discuss the issue of the dynamics of macroeconomic indicators by structural elements, both in terms of comparable prices and of establishing the idea of ensuring comparability on total and structure. Reference is also made to measuring the inflation that is needed to bring the indicators to comparability.

Keywords: Parity; International Comparison; Gross Domestic Product; Price Index; Euro Union (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:hur:ijaraf:v:8:y:2018:i:2:p:37-47