The World Bank uses the Atlas method to convert local currency into USD. The Atlas method is just one way to convert local currencies into USD so that we can easily compare the economies of countries. It is also the method used by the World Bank when determining its lending policy to a country. It is the preferred method of the World Bank and takes into consideration three-year average exchange rates adjusted for inflation. The World Bank argues that by looking at three-year averages, it "lessens the effect of exchange rate fluctuations and abrupt changes." While it is NOT the only method available, it is one of the more documented and reliable methods. One of the main limitations of the Atlas method is that it may underestimate the income in lower-income economies because it does not take into account subsistence activities (the informal sector for example) that may be more common in lower economy countries.
Another common method for converting local currencies is PPP (purchasing power parity). PPP compares different countries' currencies through a market "basket of goods" approach. The idea is to compare what would be the cost in each country for a basket of staple products within each country since countries are likely to have different basic requirements. PPP takes into consideration the purchasing power of goods in one country relative to another. For example, a pair of shoes may cost more in one country than in another and PPP takes into consideration the ability of a consumer to buy the shoes. However, for this method to have meaning, data for a large number of goods must be collected and compared and there is often disagreement over what should be included in the "basket of goods." That does not mean that PPP is not useful, it is and the World Bank also puts out a list of country rankings based on PPP.
Read more about the Atlas method and PPP from the World bank's site.
Another common method for converting local currencies is PPP (purchasing power parity). PPP compares different countries' currencies through a market "basket of goods" approach. The idea is to compare what would be the cost in each country for a basket of staple products within each country since countries are likely to have different basic requirements. PPP takes into consideration the purchasing power of goods in one country relative to another. For example, a pair of shoes may cost more in one country than in another and PPP takes into consideration the ability of a consumer to buy the shoes. However, for this method to have meaning, data for a large number of goods must be collected and compared and there is often disagreement over what should be included in the "basket of goods." That does not mean that PPP is not useful, it is and the World Bank also puts out a list of country rankings based on PPP.
Read more about the Atlas method and PPP from the World bank's site.
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