True regional purchasing power: evidence from the Czech Republic

Abstract

There is probably no question that regional price levels must be taken into account when any regional analysis is done and that price levels should be reflected in regional policies as well. The current approach of most researchers and policy makers is to use regional indicators converted, for the case of EU regions, in Purchasing Power Standard (PPS). Although the PPS indicators work well for countries they probably fail for regions. The main reason is that regional purchasing power standards do not reflect actual regional price levels – there is only a national parity (price level) which is equally applied to all the regions within a country. This downgrades the reliability of regional PPS indicators and raises serious analytical and political issues. The key problem is that most regional socio-economic indicators can significantly change when regional price levels are taken into account. The aim of this article is to present results of research focused on regional price levels estimation in the Czech Republic. The results clearly show that there are substantial differences between newly computed real regional indicators and currently used PPS indicators. The impact of these findings on regional convergence, households' real income and the effectiveness of cohesion policy are considered. This topic is broadly discussed worldwide, although in the Czech Republic just first attempts can be seen. Nevertheless, its importance will probably increase, especially in relation to the system of European financial aid distributed according to regional gross domestic product (GDP) per capita in PPS.

Acknowledgements

Earlier versions of this article were presented at the ‘Networked Regions and Cities in Time of Fragmentation: Developing Smart, Sustainable and Inclusive Places’ workshop held at Delft University of Technology, 13–16 May 2012, and in Regionální studia, journal of the University of Economics, Prague (Čadil et al.2012) and Statistika, economy and statistics journal (Musil et al.2012a). This work was supported by The University of Economics, Prague [grant number IGA MF/12/2011]. The authors would like to thank anonymous referees for their extremely valuable and extended suggestions on how to improve the article. All errors and omissions remain the authors' own.

Notes

^1. GDP per capita is often applied for comparisons of states or regions (Gardiner et al.2004, Novotný 2010) and serves very well especially for comparison of regional or state economic performance. Giovannini (2008, p. 162) sees GDP even as ‘the most prominent of all the variables in the national accounts’. Moreover, regional GDP is classified among the most important regional indicators in the European System of Accounts (Eurostat 1996) standard ESA 1995 (Hronová et al.2009, p. 268).

^2. For more detailed information about the EKS method see European Commission (2006), Jílek and Moravová (2007, pp. 227–229) or Slavík (2007).

^3. For detailed calculation see Musil et al. (2012a).

^4. NPISH stands for non-profit institutions serving households.

^5. The CPI represents a Laspeyres type of price index, i.e. the weights are derived from the base year. On the contrary, the weights in the European Comparison Programme come from current years. The consumption basket of the CPI is based on monetary expenditure while the FHCE also includes consumption in kind (e.g. self-supply). Consumption of prostitution, drugs and FISIM (financial intermediation services indirectly measured) are included in the FHCE as well.

^6. There are several issues concerning especially the validity of GDP (see Stiglitz et al.2009) but it is not the intention of this article to deal with the calculation methodology of GDP and other indicators.

^7. Housing is especially expensive in Prague in comparison to other regions.