Markov Chain approach to Purchasing Power Convergence in the 15 European Union

In the present paper we study the degree of convergence in the European Union from the Purchasing Power Parity (PPP) point of view. The price of the shopping basket can be the cause of disparities in a global market in construction that, like the European Union, is formed by different countries with different consumption habits. In addition, in this construction process twelve out of fifteen countries of the EU have left its national currency to adopt the Euro like common currency. Therefore, it is necessary for the stability of the Union process in the long run that, among others, purchasing power of the different state members tends towards a same common value. Moreover, the question is whether that process of convergence within the European Union is taking place or not. In order to solve this question, the series of the Absolute Purchasing Power Parity (APPP) are estimated through the suggestion of Rodriguez et al (2004). These authors use the Harmonized Consumer Price Index in the European Union and the nominal exchange rates of the different currencies with euro. Monthly estimates of the APPP series for the 1995-2002 period are obtained for each of the fifteen countries. These figures show, for each country, their relative position to the average value of the European Union. Using these series we applied the Markov Chain methodology to study the time evolution of the distribution of APPP in the European Union. This methodology has been very used by its facility of calculation and interpretation of the results. Nevertheless, with the purpose of obtaining good estimations it is necessary to solve the discretization problem of a continuous variable. This is, to use a finite set, and relatively small number of states, for a variable with infinite values. In the present work different approaches are used to solve the problem. We test for structural change on the estimated probabilities using adapted test to Markov Chains. This allows us to study if an effect exists on the Purchasing Power Parity with the entrance of the Euro. Markov Chains are estimated by Maximum likelihood, and allow us to do different analyses. In the first place, we can study the mobility of the distribution, measured through the probabilities of permanence or not in the same state, and in the degree of diagonal structure of the resulting matrix. This objective can obtained by direct observation, calculating Mobility Index, or using expected time of first passage. Secondly, we can obtain the ergodic or long term distribution. This one shows the temporary evolution in the long run of the distribution, under the hypothesis of maintenance of the present conditions. This distribution would show the possible convergence or not of the whole distribution. We also estimate elasticities of ergodic probabilities, to analyze the effect of each probability in the Markov chain in the long run distribution. Results show differences with the Euro Entry, mobility towards convergence within the distribution is slow, with high elasticities of the ergodic distribution to changes in the transition probabilities.

Formulas for Consumer Price Index at the elementary aggregate - A new proposal from the economic point of view

The price level in the aggregate economy and, more concretely, controlling its changes, has become one of the high-priority objectives within the framework of the regional macroeconomic analysis. Its different evolution could modify the interregional capital and commercial flows, being able to cause strong shocks, and of asymmetric nature, in each economy. The first step to reach this objective is obtaining a trustworthy and comparable measurement of the inflation in the different regions to be compared. The Index Number Theory is then used to calculate Consumer Price Indexes (CPI) the regional level. The calculation of CPI is made, at least, in two phases. In the first one, Elementary Price Index is considered (EPI). In the second and later phases, these EPI are combined, along with weighting information based on household’s expenditure, to obtain CPI for different aggregation levels to the country level. As previous step to the calculation of the IPE and CPI, the set of goods and services has to be defined based on households’ consumption behaviour. These sets are grouped in layers, named elementary aggregates, based on their homogeneity of satisfying consumer’s necessities. The COICOP (Classification Of Individual Consumption by Purpose) has important implications at the time of analyzing the behaviour of the consumer within each elementary aggregate, because of a high possibility of substitution between products. Nevertheless, this possibility diminishes and can get to be null when the goods and services satisfy necessities with very different nature. Whether what is wanted it is to calculate an EPI that correctly reflects the consumer behaviour, the described homogenous character cannot be forgotten, especially if, in addition, we take into account that National Statistics Agencies have no expenditure information available for weighting purposes, only data of prices to calculate EPI. This paper is focussed on analysis of the formula used to obtain the IPE, with the limitations of available information just commented. The election of the formula for the IPE has not been widely studied in the economic literature, being the proposal by Carli in 1764 and Dutot in 1738 [ extracted Reference of OIT (2003), chapter 20, pages 12-13 ] the most often used for practical purposes. Nevertheless, Fisher (1922) had already recommended not using the Carli’s formula because of the bias to the rise that it introduces [Fisher (1922), pages 29-30]. Throughout the 20th century different authors has continued looking for the ideal formula extending possible approaches to the subject: the approach of Divisia, the stochastic approach, the economic approach and the axiomatic approach. The final summary of these studies can be synthesized in "Toward to Dwells Accurate Measure of The Cost of Living” by the Advisory Commission To The Study The Consumer Price Index presented in 1996. This report, also known as Boskin’s Report, suggests the use of geometric mean price indices at the elementary aggregate for the EPI, this formula is attributed to Jevons in 1983 [OIT (2003), chapter 20, pages 12-13 ]. In the present paper, we demonstrate that all usually formulas for the calculation of the IPE are incoherent with the theory of consumer behaviour, in an aggregate characterized by the high level of substitution caused by homogeneity in the consumption purpose. In addition, the formula proposed by Rodriguez, González and Rodriguez (2004), is not only superior from the axiomatic point of view, but also from the economic approach, is the only one that is able to reflect the expected consumer behaviour.

CONSUMER’S SATISFACTION - EXPLANATORY MODELS

When the first studies related to consumer satisfaction began to appear in the sixties, nobody could imagine protagonism that it would reach with the course of the time. Nowadays not only private sector companies dedicate part from their resources to the study of the degree of satisfaction of their clients, but satisfaction studies are more and more increasing preoccupation in the state sector, therefore works related to the satisfaction of the patients, the contributors or with the tourist destiny can be found. Firstly, a revision of the different models that have been used to explain customer satisfaction level is presented, using the cognitive and the affective-cognitive models. In the first case, human being is looking as a rational being that can process information about the different attributes of the services to form his personal satisfaction. The most useful model within this category is the expectation disconfirmation model. These kind of models explain satisfaction as a function of the degree and direction of the discrepancy between expectation and perceptions. It has evolved all over time resulting in a lot of different approaches. We have also studied the equity model, in which consumer does a benefit-cost analysis not only its owns but from the rest of people who take part in the transaction. Finally, in the affective-cognitive models, human being is seeing like a complex being that is not solely an information processor but experiences feelings and emotions that also influence in their judgments of satisfaction. Secondly, it has been realized an empirical application in which we have used the main variables in the expectation disconfirmation model: perceptions, expectations and discrepancies to estimate some logit models. The tourists who visit Tenerife are classified as satisfied or unsatisfied. Then, we model the probability of each characteristic using tourist’s scores on some destination attributes. Two samples have been used. The first one was obtained at the time of arriving; the second one has been made when leaving the island. Since tourists are not necessary the same in both samples, a statistic inference process has been made to use all the information available. The best model is obtained when expectations and perceptions are used at the same time, so we obtain a 75% of right classification. To sum up, we have found that perceptions are the main subject for the tourist’s satisfaction, although we can’t forget the importance of expectations to complete the model.

MEASURING POVERTY IN AN ULTRAPERIPHERAL REGION - THE CASE OF THE CANARY ISLANDS

The Canary Islands (one of Spain's 17 autonomous communities) is considered in the EC Treaty "ultra-peripheral region" which means: i) differences in the development processes and integration that justify certain specific policies (six out of the seven regions involved are among the poorest in the EU). This is related with remoteness, insularity, small size, difficult topography and climate, and the dependence on a small number of products; ii) the remoteness from the mainland countries and climatic conditions (tropical or subtropical) and, iii) the role of EU frontier and the geographical structure characterized by size and distance. With data of the Survey of Social Conditions (2001) we study the income inequality of individuals in The Canary Islands. Individuals are divided into various subgroups along several dimensions, such as island of residence, age, employment status etc. The difference in inequality between and within the various subgroups is studied using absolute-relative poverty line. We estimate poverty using a subjective approach too, where the level of the poverty line is derived using the opinion of the individual, rich or poor, on poverty. The subjective poverty line used is the Leyden Poverty Line based on subjective questions regarding income and economic welfare.