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.