When calculating Gross National Income, GNI (GNP in 68SNA terms), per capita in a common currency for operational purposes, the World Bank uses a synthetic exchange rate called the Atlas Conversion Factor. The Atlas Conversion Factor is computed as a three year average of the exchange rate of local currency to US$, adjusted for relative inflation. The purpose of using a synthetic exchange rate is to reduce or smooth the impact of exchange rate fluctuations in the cross-country comparison of national income.
The calculation is carried out by taking the simple arithmetic average of the actual exchange rate for year t, and the exchange rates for year t-1 and t-2 adjusted for relative inflation. The inflation adjusted exchange rate of year t-1 is derived as the actual exchange rate for year t-1 multiplied by the inflation rate in the country between t-1 and t divided by the rate of “international inflation” in the corresponding period. This adjusted exchange rate year t-1 is the exchange rate that one should expect in year t, if the move in the exchange rate reflected only the relative price-changes. A similar calculation is carried out for year t-2.
The international inflation is measured by the increase in the SDR-deflator in US$ terms. The SDR deflator is calculated as a weighted average of the G5-countries’ GDP deflators (See: 1.3.1 the SDR-deflator as used in the Atlas Conversion Factor).
The following example shows, for Namibia, how GNP per capita estimates in US$ can be derived using the Atlas Conversion Factor, and the difference between using a simple exchange and the Atlas methodology.
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