[Extract] Making credible international price level comparisons is difficult. Commercial exchange rates do not necessarily reflect real differences in purchasing power between countries and a single currency convertor does not accurately represent price level differences across different components of an economy. The World Bank, through its International Comparison Program (ICP), is responsible for the production of Purchasing Power Parities (PPPs) for both national economies (Gross Domestic Product, GDP) and for sub-components of GDP for around 200 countries (see World Bank 2018a). PPPs are alternatives to market exchange rates and are intended to reflect price level differences across countries more accurately. One of the sub-components of GDP in the ICP is construction, part of Gross Fixed Capital Formation (GFCF) or investment.
The main components of GFCF are machinery and equipment, and construction. In terms of content and price levels these two are very different: machinery and equipment items are generally internationally traded and as a result are likely to have PPPs that are broadly similar to commercial exchange rates; the bulk of construction, on the other hand, is an essentially local activity and is likely to have PPPs that are markedly different to exchange rates or machinery and equipment PPPs. In poorer countries, construction price levels and, therefore, construction volumes are likely to be understated using exchange rates, while in richer countries, the opposite is often the case.
|Title of host publication||Accounting for Construction: Frameworks, Productivity, Cost and Performance|
|Editors||Rick Best, Jim Meikle|
|Place of Publication||Abingdon|
|Number of pages||25|
|ISBN (Electronic)||978-1-315-23178-5 |
|Publication status||Published - 11 Apr 2019|