A new term for Purchasing Power Parity

[0UmfHxcvx5J7JoaOhFSs5mncnisTJJ6q]

Description of the issue

This originates from OEO Dev Meeting 24.

IAMs note economic quantities (income levels, GDP losses, …) either as market exchange rate (MER) or purchasing power parity (PPP).

Ideas of solution

Found some shit on the internet:

The Purchasing-power-parity (PPP) exchange rate (or conversion rate) between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country's currency will purchase the same volume of goods and services in the second country as it does in the first.

@OpenEnergyPlatform/oeo-domain-expert-economy might want to chime in.

Workflow checklist

• I discussed the issue with someone else than me before working on a solution
• I already read the latest version of the workflow for this repository
• The goal of this ontology is clear to me

I am aware that

• every entry in the ontology should have a definition
• classes should arise from concepts rather than from words

[l-emele]

I unassign myself as I am by no means an expert in economic terms like market exchange rate (MER) or purchasing power parity (PPP). But maybe @han-f wants to chip in instead.

[han-f]

I can definitely contribute to the discussion once it has started. Inviting @litotes18 over too.

[KaiSchnepf]

Since I have more of a technical background, I just searched for another definition and found this one at the world bank:

PPPs measure the total amount of goods and services that a single unit of a country’s currency can buy in another country. The PPP between countries A and B measures the amount of country A’s currency required to purchase a basket of goods and services in country A as compared to the amount of country B’s currency to purchase a similar basket of goods and services in country B.

I´m not sure, if PPP only exists between two countries or also in two geographical areas with the same currency.
I hope, I could contribute a little to get the discussion going, but with my limited knowledge of economics I probably create more misunderstandings than help. So the knowledge of our economy experts would be great!

[0UmfHxcvx5J7JoaOhFSs5mncnisTJJ6q]

PPP is only used to convert between currencies. Within a single country (say former East and West Germany today) or "currency area" (like the Euro area) on just observes price differences.
The definitions are potayto–potahto to me.

[KaiSchnepf]

PPP is only used to convert between currencies. Within a single country (say former East and West Germany today) or "currency area" (like the Euro area) on just observes price differences.

• Alright, thanks for your answer! Then wikipedia should change its german PPP-site.

I unassign myself because of my lack of knowledge in economic topics.
@OpenEnergyPlatform/oeo-domain-expert-economy will hopefully join the discussion.

[han-f]

To my understanding one can use the purchasing power parity to account for price level differences between countries - and thus make them comparable. It would thus be some kind of a spatial price deflator and currency conversion at the same time(as opposed to a deflator that accounts for inflation over time).

You may then end up with data expressed in, for example, $ (PPP) as here: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD

So using PPP to express monetary values does not deflate for inflation but rather for differences in purchasing power (in German: Kaufkraftbereinigung).

Is this concept needed to properly describe the IAM context in the ontology?

If yes, I wonder whether we may want to start with defining the concept of "Kaufkraftbereinigung", using a suitable english term, e.g. "purchasing power deflation"?

@litotes18 - what is your take on this?

[litotes18]

I think that the main point of PPP is to make data/results comparable. So what did 10 000 Dollars of the US 1871 mean today in Euro? Thus, the two definitions that capture that (e.g. Worldbank) with the basket comparison are useful in my opinion.

[han-f]

So would we possibly need two different concepts?

• Concept 1: deflating for inflation within a country and make the different data of a time series of monetary values (e.g. GDP of Germany) comparable with one another. E.g. deflate all data points of such a given time series to the same base-year.

• Concept 2: spatial price deflation (PPP) to deflate for purchasing power differences across countries and make data between countries comparable for a given year.

[0UmfHxcvx5J7JoaOhFSs5mncnisTJJ6q]

Is this concept needed to properly describe the IAM context in the ontology?

Not sure what "the IAM context" is, but the IAMC expresses GDP (and losses thereof) in terms of PPP, therefore we need something in the ontology to point to for those figures.

Concept 1: deflating for inflation within a country and make the different data of a time series of monetary values (e.g. GDP of Germany) comparable with one another. E.g. deflate all data points of such a given time series to the same base-year.

Yes, as argued before.

Concept 2: spatial price deflation (PPP) to deflate for purchasing power differences across countries and make data between countries comparable for a given year.

This too. But I wouldn't talk about deflation in regard to this, unless economists are too. (I haven't met any that do.)

[han-f]

Not sure what "the IAM context" is, but the IAMC expresses GDP (and losses thereof) in terms of PPP, therefore we need something in the ontology to point to for those figures.

I refererred to IAM context, because in the description of the issue it read: IAMs note economic quantities (income levels, GDP losses, …) either as market exchange rate (MER) or purchasing power parity (PPP).

(I haven't met any that do.)
Now you did.
I consulted the metadata from the linked World Bank Dataset and here it reads:
This indicator provides per capita values for gross domestic product (GDP) expressed in current international dollars converted by purchasing power parity (PPP) conversion factor. GDP is the sum of gross value added by all resident producers in the country plus any product taxes and minus any subsidies not included in the value of the products. conversion factor is a spatial price deflator and currency converter that controls for price level differences between countries. Total population is a mid-year population based on the de facto definition of population, which counts all residents regardless of legal status or citizenship.

[0UmfHxcvx5J7JoaOhFSs5mncnisTJJ6q]

Now you did.

Nice meeting you. Deflate away! :)

[han-f]

Now you did.

Nice meeting you. Deflate away! :)

I just suggested in #335 that it may be helpful to have a meeting in a smaller group to discuss this, but also the terms that we started with some time ago. Feels better to "deflate" as a team ;-)

[han-f]

For PPP this FAQ from OECD may come in handy.

[han-f]

In the meeting on October 18 we (@0UmfHxcvx5J7JoaOhFSs5mncnisTJJ6q , @stap-m , @jannahastings and @han-f ) derived the following definition:

• draft definition: ratio between currencies that equalises differences in monetary price levels between countries for the same set of goods/commodities
• parent class: ratio

remaining definitions to be implemented from that meeting I'll add to #335

[l-emele]

The class good is a parent to commodity so ratio between currencies that equalises differences in monetary price levels between countries for the same set of goods should be sufficient.