On Purchasing Parity (March 2023)

According to Eurostat data, Slovakia's GDP in purchasing power parity (PPP) is lagging behind the EU average, despite the fact that real GDP in Slovakia is growing faster than the European average. Why?  There are two main reasons:

1. The first stems from methodological shortcomings in the measurement and revision of price levels (PPP)

• The way prices are collected to calculate PPPs varies between countries, which overstates Slovak housing prices in particular. If housing prices were to evolve in the Slovakia as in the Czechia, GDP in PPP terms would be at 72per cent of the EU average in 2021, instead of the current 69per cent.
• Eurostats‘ revision policy of the PPP time series. The time series before and after 2015 is not consistent and even minor changes in the PPP calculations after that year are adjusted only 3 years backwards. Therefore, GDP in the PPP sometimes jumps sharply and its year-to-year changes are sometimes difficult to explain.

2. The second reason why GDP at PPP and GDP at constant prices differ is that the two indicators measure two different things. GDP at PPP measures the purchasing power of our income (wages and profits), while GDP at constant prices measures the volume of real output. And in an open economy, we can't always exchange (i.e. import) the same volume of goods for the same volume of output. The growth in the volume of real output is higher than the growth in the standard of living in Slovakia by up to 0.5 p.p. on average each year, because the prices of imported goods are rising faster than the prices of exported goods. This slows down convergence towards the EU average.