PPS and EU Regional Price Level Problem

ABSTRACT

The Purchasing Power Standard (PPS) is widely used for economic analyses, studies and strategic documents in the European Union. Although it is a necessity to take the purchasing power i.e. price level into consideration the state of art of PPS is not usable at regional level. The current PPS is not reflecting regional prices but is based on one country price level. This might lead to serious imperfections and misspecifications especially in relation to regionally oriented policies like the Cohesion Policy. Using PPS for analyzing convergence reveals quite puzzling conclusions which are supporting this possible problem of PPS. It is vital for the EU policies to become efficient to compute new regional price levels or to substantially modify current PPS.