Geary Khamis Dollar

Geary-Khamis dollar and international dollar is a unit of account ( currency dummy) which has the same purchasing power in a given country than the U.S. dollar to the U.S. at any given time. The year 1990 is most often used as a basis for comparisons over several years. It was invented in 1958 by Roy C. Geary , then developed by Salem Hanna Khamis between 1970 and 1972. Geary-Khamis dollar is commonly used by international organizations like the United Nations (UN), the World Bank or International Monetary Fund (IMF).

Summary 1 Overview 2 Calculation 3 Properties 4 Other methods 5 Bibliography 6 Notes and references

/ / Introduction

The idea of international dollar has been proposed by Roy C. Geary in 1958, when he was a consultant for the United Nations Food and Agriculture , in order to construct an index of global agricultural production. Irving Kravis, Alan Heston and Robert Summers of the University of Pennsylvania have then taken the Geary as the basis for the International Comparison Program (ICP), a project whose objective is to publish nationally comparable statistics on GDP and its components. In particular Khamis provided a list of necessary and sufficient conditions for the method of calculation provide sensible international prices (not negative).

The ICP was in turn used as the basis for the development of Penn World Tables , a set of statistics covering a hundred countries from 1950, used in many studies seeking to provide a quantitative justification for factors thought to economic growth.

The Geary-Khamis method uses two common approaches, the purchasing power parity (PPP), and average prices of raw materials (including food ). It is thus based on the construction of a "international price" for each material / commodity, and a purchasing power parity for each country.

Geary-Khamis dollar is used to indicate the value of a currency within the borders of the country. It allows for comparisons between countries and between years. For example, to compare living standards between countries, it is more reliable to compare the gross domestic product per capita Geary-Khamis dollars rather than depending on exchange rates , which vary greatly from one year to another without that the level of life does it feel.

Calculation

It is assumed that PPP _j represents the parity of the ^jth currency with a currency of reference called "international dollars". The international price P _i of the raw material i is the average price p _ij in the different countries studied, weighted by the amount consumed in each country q _ij. As prices in each country are initially expressed in local currency, the Geary-Khamis international dollars converts them using purchasing power parities.

P _i is then expressed:

Either:

The parity of each currency j is defined by: . In this equation, the numerator represents the total consumption in country j expressed in local currency and the denominator is the value of this consumption expressed in international dollars using international prices P _i.

Geary-Khamis system is a system of linear equations , N Equations representing the international prices, and M equations representing the purchasing power parities, with (M + N) unknowns. This system has a unique solution if one of the unknowns is fixed at an arbitrary value . For example, if we fix P P A ₁ = _1, that is to say, if currencies are expressed in terms of the currency of the country used as a unit of account, all other parities and international prices may be calculated, and the result is unique. Solving this system of equations is done in practice by iterative methods which converge quickly .

Properties

The Geary-Khamis method is independent of the reference country (for a change of reference, simply multiply all parities with the same value). The system of equations is solvable (it always has a solution). Parities are transitive. Total spending by country are additive, that is to say that each country (The total value converted to real prices using the PPP is equal to the actual price value of the quantity produced, and the matrix of consumption q is consistent between commodities and between countries ).

Among the drawbacks of this method, the results are sensitive to the choice of countries and commodities, and total expenditures per country are subject to the Gerschenkron effect.

Data expressed in international dollars can not be converted into local currency using the exchange rate in effect and must be converted using purchasing power parity used when compiling the data.

Other methods

The main competitor of the Geary-Khamis is the EKS method, first proposed by Corrado Gini in 1930 and independently rediscovered by Koves and Elteto (1964) and Szulc (1964). The EKS method is used by the OECD and Eurostat.

Bibliography

• (In) System Overview Geary-Khamis on the site of the United Nations Food and Agriculture Organization (FAO), contains the equations mentioned
• (In) Geary-Khamis Method , OECD Glossary of Statistical Terms
• (In) Use of the dollar internationally by the World Bank
• (In) Nations and firms in the Global Economy Ch 11 Globalization and Economic Growth
• (In) Handbook Of The International Comparison Program. Annex II - Methods Of Aggregation. Statistical definition at the UN United Nations Statistics Division. 2007
• (In) Geary RC 1958. An International Comparison of National Products and Purchasing Power of Currencies ECAI, Paris
• (In) J. Peter Neary, RC Geary's Contributions to Economic Theory, published in D. Conniff (Editor), RC Geary, 1896-1983: Irish Statistician, Oak Tree Press, Dublin, 1997

References

• (In) This article is partially or entirely from the article in English entitled " Geary-Khamis dollar (see the list of authors )