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GEARY-KHAMIS METHOD

Statistics Directorate    
Definition:
An aggregation method in which category "international prices" (reflecting relative category values) and country purchasing power parities (PPPs), (depicting relative country price levels) are estimated simultaneously from a system of linear equations. Has the property of base-country invariance, matrix consistency and transitivity.

Context:
The Geary-Khamis method is an average price method first used by the ICP to compute PPPs and real final expenditures above the basic heading.

It entails valuing a matrix of quantities using a vector of international prices. The vector is obtained by averaging national prices across participating countries after they have been converted to a common currency with PPPs and weighted by quantities.

The PPPs are obtained by averaging within participating countries the ratios of national and international prices weighted by expenditure.

The international prices and the PPPs are defined by a system of interrelated linear equations that require solving simultaneously.

The GK method produces PPPs that are transitive and real final expenditures that are additive. It has a number of disadvantages. One is that a change in the composition of the group can change significantly the international prices as well as the relationships between countries. Another is that the real final
expenditures are subject to the Gerschenkron effect which can be large.

Within the context of Eurostat-OECD comparisons, GK results are considered to be better suited to the analysis of price and volume structures across countries. Eurostat and the OECD published in their joint publication an annex with a selection of GK results chosen specifically for such structural analysis.

Eurostat, OECD, 2007, Eurostat-OECD Methodological Manual on Purchasing Power Parities, OECD, Paris – Annex VII, Glossary of terms and abbreviations.

Source Publication:
Handbook of the International Comparison Programme, Studies in Methods, Series F, No. 62, United Nations Department of Economic and Social Development, Statistical Division, New York, 1992, Glossary.

Hyperlink:
http://unstats.un.org/unsd/methods/icp/ipco_htm.htm

Statistical Theme: Prices and purchasing power partities

Created on Thursday, February 06, 2003

Last updated on Thursday, July 12, 2007