REGIONAL LINKING

ICP 2005 ROUND

REGION 1

REGION 2

REGION 3

bridgecountry

bridgecountry

bridgecountry

bridgecountry

Past Practice: Bridge Countries

Disadvantage:

Reliance on single links

Ring Region

REGION 1

REGION 2

REGION 3

RING

Principles of Ring Linking

1. Ring product list is created (because Regional lists have limited overlap);

2. Regional fixity is retained at BH level; 3. Regional BH parities are produced with CPRD; 4. Ring Region is used for linking only [with a CPRD-

style index].

The CPRD model:

(1) Pikr = i k r ikr i = 1, 2, … n

(2) 1 = 1 = 1 = 1 k = 1, 2. r = 1, 2, … 6

y X β ε

2 1

2 1

... ...

... ...

cp Nc Np cp

T

Nc Np

x Dc Dc Dp Dp R

Where Rcp stands for representativity dummy, and is its respective regression coefficient.

Ring linking: an example

Table 1: Item Prices in Domestic Currencies for the Ring Countries at a Specific Basic Heading Level Item Region A Region B Region C Country A1 Country A2 Country A3 Country B1 Country B2 Country C1 Country C2 1 1 r 2 r 4 r 2 r 6 r 3 r 30 r 2 2 r 5 __ 6 10 r 5 r __ 3 6 r 10 r __ 10 r __ 22 160 r 4 4 r __ 18 __ 30 10 r 150 5 5 r __ 20 r __ __ __ 180 6 12 r 30 40 r 24 r 72 r 36 r 360 r

Table 2: Basic Heading PPP’s for Each Region for the Ring Countries Country A1 A2 A3 B1 B2 C1 C2 Basic Heading PPP 1 2 4 1 3 1 10

Table 3: Item Prices in Numeraire Country Currencies for the Ring Countries at a Specific Basic Heading Level Item Region A Region B Region C Country A1 Country A2 Country A3 Country B1 Country B2 Country C1 Country C2 1 1 r 1 r 1 r 2 r 2 r 3 r 3 r 2 2 r 2.5 __ 6 3 1/3 r 5 r __ 3 6 r 5 r __ 10 r __ 22 16 r 4 4 r __ 4.5 __ 10 10 r 15 5 5 r __ 5 r __ __ __ 18 6 12 r 15 10 r 24 r 24 r 36 r 36 r

Table 4: Basic Heading CPD and CPRD PPP’s between the Three Regions Method Region A Region B Region C CPD 1 2.047 3.006 CPDR 1 2.014 2.937

FIXITY

Item level BH level GDP level All aggregates

Fixity at the GDP level (OECD)

Version 1. Running full global BH matrix, with each OECD country as a separate entity, then the OECD total is redistributed on the basis of the regional OECD comparison.

Version 2. Creating an OECD “country” to be included in the global comparison, then the OECD “country’s” GDP is redistributed on the basis of the regional OECD comparison.

Questions?