Comparative price levels for investment
From Statistics Explained
- Data from December 2012, most recent data: Further Eurostat information, Main tables and Database.
This article focuses primarily on price levels of investment in the European Union (EU) Member States, covering also three EFTA Member States (Iceland, Norway and Switzerland), acceding state Croatia, as well as four EU candidate countries (the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey), and two potential candidate countries (Albania, Bosnia and Herzegovina).
Main statistical findings
In 2011, the highest price level for investment among the EU Member States was observed in Sweden at 36 per cent above the EU average, while in the cheapest EU Member State, Romania, the price level was 41 per cent below the EU average. These are the main conclusions drawn from the results of two price surveys carried out in 2011 within the Eurostat-OECD Purchasing Power Parities (PPP) Programme. The two surveys cover construction (residential buildings, non-residential buildings and civil engineering works) and machinery, equipment and other products.
The results of the surveys are expressed in price level indices (PLIs), which provide a comparison of countries' price levels with respect to the EU average: if the PLI is higher than 100, the country concerned is relatively expensive compared to the EU average, while if the index is lower than 100, then the country is relatively inexpensive compared to the EU average.
Figure 1 shows the 2011 PLIs for total investment. The cheapest country for investments is the former Yugoslav Republic of Macedonia with a PLI of 56, followed by Albania and Bosnia Herzegovina with a PLI of 57 each. On the other end of the spectrum, Norway, Switzerland and Sweden record the highest price levels for investments, with PLIs of 153, 142 and 136, respectively.
Machinery, equipment and other products
Figure 2 shows the PLIs for machinery and equipment, including metal products and equipment, electrical and optical equipment and transport equipment (see classification of investment products used). The main characteristic shown by this chart is that the price levels for this type of products are relatively homogenous across countries. Prices in the most expensive country, Norway, are 48 per cent higher than those in the least expensive country, Hungary.
Table 1 shows the countries' PLIs for the aggregate machinery and equipment as well as for its three main sub-groups: metal products and equipment, electrical and optical equipment, transport equipment. In addition, the PLIs for software are shown. Countries are sorted according to their overall price level for investment (first column) within the following groups: EU-27, EFTA Member States, acceding state Croatia, candidate countries and potential candidate countries. The shaded fields indicate the highest and lowest PLIs per category among the 27 EU Member States. The highest and lowest PLIs among all 37 participating countries are marked in bold.
The results show that Greece is the most expensive EU Member State for total machinery and equipment, as well as for metal products and equipment and electrical and optical equipment. Finland has the highest price level for transport equipment, while Slovakia shows the highest prices for software, among the EU Member States.
On the other hand, Hungary is the cheapest EU Member State for total machinery and equipment and metal products and equipment. The United Kingdom is the least expensive EU Member State for electrical and optical equipment, whereas Poland is the cheapest for transport equipment. Ireland has the lowest price level for software among the EU Member States.
At the bottom of the table, variation coefficients are provided for the euro area (EA-17), the European Union (EU-27) and the group of all countries participating in the program (All 37). The variation coefficient is defined as the standard deviation of the PLIs of the respective group of countries as percentage of their average PLI. The higher the variation coefficient, the higher is the price dispersion in the respective category.
The variation coefficients at the bottom of Table 1 confirm the relatively low price dispersion across countries for these investment products.
Among all 37 countries, the category that shows the highest homogeneity of price levels across countries is software, while the category showing the highest price dispersion is transport equipment.
Figure 3 presents the PLIs for construction. The country with the lowest price level is Bosnia and Herzegovina, with PLI of 38. The most expensive countries for construction investment are Norway and Switzerland with PLIs of 172, more than 4 times as expensive as Bosnia and Herzegovina. Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Albania, Romania, Serbia, Bulgaria and Turkey are the cheapest countries for investment in construction, showing price levels under 50 per cent of the EU average. On the other hand, Iceland, Sweden, Switzerland and Norway are the most expensive countries for investment in construction, with PLIs of more than 40 per cent above the EU average.
Table 2 shows the PLIs for the main categories of construction expenditure (residential buildings, non-residential buildings and civil engineering works). In this table countries are sorted according to their PLI for total investment (first column) within the following groups: EU-27, EFTA Member States, acceding state Croatia, Candidate Countries and potential candidate countries.
As in Table 1, the shaded fields indicate the highest and lowest PLIs per category among the 27 EU Member States. The highest and lowest PLIs among all 37 participating countries are marked in bold.
Romania is the Member State that shows the lowest price levels for all categories of construction, except residential buildings, where Bulgaria is slightly cheaper. Sweden is the most expensive EU Member State for all construction categories.
Price dispersion is most apparent within the 37-country group. It is much less significant in the euro area (EA-17) than in the EU as a whole. Price dispersion for all categories of construction is higher than that for total investment, due to the higher share of labour input into construction and the high dispersion of wages across countries. Price dispersion is less in civil engineering than for residential and non-residential buildings.
Data sources and availability
The data in this article are produced by the Eurostat-OECD Purchasing Power Parity (PPP) programme. The full methodology used in the programme is described in the Eurostat-OECD Methodological manual on purchasing power parities which is available free of charge from the Eurostat website (see under "Further Eurostat information"). In their simplest form PPPs are nothing more than price relatives that show the ratio of the prices in national currencies for 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.
Price levels as presented in this publication are the ratios of PPPs to exchange rates. They provide a measure of the differences in price levels between countries by indicating for a given product group the number of units of common currency needed to buy the same volume of the product group or aggregate in each country.
Price level indices (PLIs) provide a comparison of the countries’ price levels with respect 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 and vice versa. The EU average is calculated as the weighted average of the national PLIs, weighted by the expenditures corrected for price level differences. 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 cause minor differences between the PLIs and result in differences in ranking which are not statistically or economically significant.
The main use of PPPs is to convert expenditures (including GDP) of different countries into real expenditures (and real GDP). Real expenditures are valued at a uniform price level to reflect only differences in the volumes purchased in countries. PPP and real expenditures provide the price and volume measures required for international comparisons.
The impact of exchange rate changes on PLIs
As explained above, the PLI for a given country is calculated as its purchasing power parity (PPP) divided by its annual average exchange rate to the euro. This implies that exchange rate movements have an impact on the PLIs. An appreciation of a country's currency against the euro will make the country more expensive in comparison to euro area countries and this will be shown as an increase of the relative price level expressed in the PLI.
In 2011, the most prominent example is Sweden with an appreciation of 15 per cent between 2009 and 2011. This explains in some part some changes in the position of this country in PLIs compared to previously published data for 2009.
Main characteristics of the 2011 survey on prices for machinery, equipment and other products
The survey on prices for machinery, equipment and other products is carried out every 2 years. The 2011 survey, whose results are shown in this article, was carried out in three months - April, May and June 2011.
Countries collected prices for a list of 549 items, divided over 17 sub-groups in four main categories: metal products and equipment, electrical and optical equipment, transport equipment and software.
From the subgroups listed as investment categories, no prices are collected for other transport equipment, boats, steamers, tugs, floating platforms and rigs, locomotives, rail-cars, vans, wagons and other rail equipment, aircrafts, helicopters, hovercrafts and other aeronautical equipment, and products of agriculture, forestry and other products. PLIs for these sub-groups are estimated taking PPPs of other sub-groups as proxy.
Prices refer to purchasers' prices including non-deductible VAT.
Main characteristics of the 2011 survey on construction prices
The 2011 survey on construction prices, whose results are published in this article, was carried out in three months - May, June and July 2011.
Countries collected prices for a list of "bills of quantities", which are comparable construction projects such as a detached house, an office building or an asphalt road. Each bill of quantities consists of a number of chapters or major components (like earthworks, concrete, masonry, etc.) which are made up of items or elementary components (like excavation of the terrain, dumping and compacting of soil, etc.).
The construction projects are divided into 3 sub-groups: residential buildings (comprising 4 bills of quantities: detached house, a house representative for Portugal, a house representative for Nordic countries and apartment building), non-residential buildings (comprising 2 bills of quantities: factory building and office building) and civil engineering works (also 2 bills of quantities: asphalt road and bridge).
Countries are asked to collect purchasers' prices for the bills of quantities, i.e. prices actually paid in markets for the elementary components that make up those bills of quantities and the additional expenses incurred that build up to the project total cost paid by the client. Non-deductible VAT is added to these purchasers' prices.
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, 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 (EC) No 1445/2007 of the European Parliament and of the Council of 11 December 2007.
Further Eurostat information
- Price levels of investment vary by more than two to one across EU - Statistics in focus 49/2012
- GDP per capita in Purchasing Power Standards (PPS)
- Comparative price levels
- Price convergence between EU Member States
- Purchasing power parities (PPPs), price level indices and real expenditures for ESA95 aggregates (prc_ppp_ind)
- Price convergence indicator (coefficient of variation of comparative price level index for final household consumption in %) (prc_ppp_conv)
Methodology / Metadata
- Eurostat-OECD Methodological manual on purchasing power parities
- Purchasing power parities (ESMS metadata file - prc_ppp_esms)
- Regulation 1445/2007 of 11 December 2007 establishing common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination
- OECD - Purchasing Power Parities (PPP) Statistics
- World Bank - International Comparison Program (ICP)