The impact of estimated sub-national purchasing power parity on macroeconomic measures1

Abstract

Due to the lack of Purchasing Power Parities (PPPs) at sub-national level, regional Gross Domestic Product (GDP) figures have been traditionally adjusted using national PPPs. The simplifying assumption that there are no regional differences in a country, and implicitly that all regions of a country have the same cost of living, might lead to regional GDP figures (adjusted for national PPPs) that are biased and might limit the design and implementation of regional policies. This paper tries to overcome this problem by estimating PPPs at sub-national level for OECD countries (TL2 regions) and EU-27 countries (NUTS2 regions) for a time series 2000–2018 through an econometric method, which uses publicly available data and is based on the Balassa-Samuelson hypothesis. This paper also presents the implications of adjusting regional macroeconomic figures with sub-national PPPs in terms of economic welfare, regional convergence and the impact on EU cohesion funds.