The Geary–Khamis dollar, more commonly known as the international dollar, is a hypothetical unit of currency that has the same purchasing power parity that the U.S. dollar had in the United States at a given point in time. It is widely used in economics. The years 1990 or 2000 are often used as a benchmark year for comparisons that run through time. The unit is often abbreviated e.g. 2000 US dollar (if the benchmark year is 2000) or 2000 Int$.
It is based on the twin concepts of purchasing power parities (PPP) of currencies and the international average prices of commodities. It shows how much a local currency unit is worth within the country's borders. It is used to make comparisons both between countries and over time. For example, comparing per capita gross domestic product (GDP) of various countries in international dollars, rather than based simply on exchange rates, provides a more valid measure to compare standards of living. It was proposed by Roy C. Geary in 1958 and developed by Salem Hanna Khamis between 1970 and 1972.
Figures expressed in international dollars cannot be converted to another country's currency using current market exchange rates; instead they must be converted using the country's PPP exchange rate used in the study.
Currencies are commonly quoted relative to each other in the foreign exchange (“forex”) market. For example, a 1.2500 quote for the EUR/USD currency pair means that one euro is exchangeable for 1.2500 U.S. dollars. The problem with using exchange rates is that they aren’t adjusted to reflect purchasing power parity (“PPP”) or average commodity prices within each country.
Roy C. Geary created the Geary-Khamis dollar, or international dollar, in 1958 to reflect the current year’s exchange rate with current PPP adjustments. Since its introduction, the international dollar has become the metric of choice for international organizations like the International Monetary Fund (“IMF”) or World Bank for comparing wealth and earnings between countries.
What is Purchasing Power Parity?
Purchasing power parity was developed in the 16th century to determine the relative value of different currencies and set exchange rates. In theory, identical goods would have the same price in different markets when prices are expressed in the same currency absent of transaction costs and trade barriers. Similarly, any differences in inflation are equal to the changes in currency exchange rates.
Of course, transaction costs and trade barriers exist in real life since exchange rates aren’t always equal to one. Economists must therefore recalculate currency exchange rates accounting for purchasing power parity differences caused by these transaction costs and trade barriers. These calculations are ultimately what are known as Geary-Khamis dollars or “international dollars”.
Converting to International Dollars
Currency conversions to international dollars are accomplished by dividing the amount of national currency by the PPP exchange rate to arrive at the international dollar value. For example, 500,000 ISK (Icelandic Krona) divided by a 121.91 PPP exchange rate yields I$ 4,101.38. PPP exchange rates are provided by a number of different international organizations including the IMF and World Bank.
The PPP exchange rate, or PPP conversion factor, is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. Basically, these figures help investors compare the cost of goods that make up gross domestic product (“GDP”) across many different countries relative to the United States.
Importance of International Dollars
International dollars have become extremely important in a world where currency exchange rates are commonly manipulated. For example, the World Bank estimated in 2005 that one international dollar was equal to about 1.8 Chinese yuan, which was considerably off from its nominal exchange rate. A failure to account for these changes could lead to a dramatically different perception of China’s economy.
Purchasing power parity differences can also be quite extreme when it comes to GDP per capita or other measures. For example, India’s nominal GDP per capita was $1,491 in 2012 while its PPP GDP per capita was $3,829. Developing countries tend to have higher PPP while developed countries tend to have higher nominal values, but nominal and PPP values are the same in the U.S. since it’s the benchmark.
Key Takeaway Points
• Purchasing Power Parity determines the relative value between different currencies by comparing their relative purchasing power internationally using the U.S. dollar as a standard benchmark.
• Geary-Khamis or international dollars factor in purchasing power parity and are calculated by dividing a given quantity of a country’s currency by the PPP exchange rate.
• International dollars have become extremely important in investment and economic circles as some countries have experienced large disparities between nominal and PPP economic figures.
It is based on the twin concepts of purchasing power parities (PPP) of currencies and the international average prices of commodities. It shows how much a local currency unit is worth within the country's borders. It is used to make comparisons both between countries and over time. For example, comparing per capita gross domestic product (GDP) of various countries in international dollars, rather than based simply on exchange rates, provides a more valid measure to compare standards of living. It was proposed by Roy C. Geary in 1958 and developed by Salem Hanna Khamis between 1970 and 1972.
Figures expressed in international dollars cannot be converted to another country's currency using current market exchange rates; instead they must be converted using the country's PPP exchange rate used in the study.
Currencies are commonly quoted relative to each other in the foreign exchange (“forex”) market. For example, a 1.2500 quote for the EUR/USD currency pair means that one euro is exchangeable for 1.2500 U.S. dollars. The problem with using exchange rates is that they aren’t adjusted to reflect purchasing power parity (“PPP”) or average commodity prices within each country.
Roy C. Geary created the Geary-Khamis dollar, or international dollar, in 1958 to reflect the current year’s exchange rate with current PPP adjustments. Since its introduction, the international dollar has become the metric of choice for international organizations like the International Monetary Fund (“IMF”) or World Bank for comparing wealth and earnings between countries.
What is Purchasing Power Parity?
Purchasing power parity was developed in the 16th century to determine the relative value of different currencies and set exchange rates. In theory, identical goods would have the same price in different markets when prices are expressed in the same currency absent of transaction costs and trade barriers. Similarly, any differences in inflation are equal to the changes in currency exchange rates.
Of course, transaction costs and trade barriers exist in real life since exchange rates aren’t always equal to one. Economists must therefore recalculate currency exchange rates accounting for purchasing power parity differences caused by these transaction costs and trade barriers. These calculations are ultimately what are known as Geary-Khamis dollars or “international dollars”.
Converting to International Dollars
Currency conversions to international dollars are accomplished by dividing the amount of national currency by the PPP exchange rate to arrive at the international dollar value. For example, 500,000 ISK (Icelandic Krona) divided by a 121.91 PPP exchange rate yields I$ 4,101.38. PPP exchange rates are provided by a number of different international organizations including the IMF and World Bank.
The PPP exchange rate, or PPP conversion factor, is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. Basically, these figures help investors compare the cost of goods that make up gross domestic product (“GDP”) across many different countries relative to the United States.
Importance of International Dollars
International dollars have become extremely important in a world where currency exchange rates are commonly manipulated. For example, the World Bank estimated in 2005 that one international dollar was equal to about 1.8 Chinese yuan, which was considerably off from its nominal exchange rate. A failure to account for these changes could lead to a dramatically different perception of China’s economy.
Purchasing power parity differences can also be quite extreme when it comes to GDP per capita or other measures. For example, India’s nominal GDP per capita was $1,491 in 2012 while its PPP GDP per capita was $3,829. Developing countries tend to have higher PPP while developed countries tend to have higher nominal values, but nominal and PPP values are the same in the U.S. since it’s the benchmark.
Key Takeaway Points
• Purchasing Power Parity determines the relative value between different currencies by comparing their relative purchasing power internationally using the U.S. dollar as a standard benchmark.
• Geary-Khamis or international dollars factor in purchasing power parity and are calculated by dividing a given quantity of a country’s currency by the PPP exchange rate.
• International dollars have become extremely important in investment and economic circles as some countries have experienced large disparities between nominal and PPP economic figures.
