Definition: Geary-Khamis method

Category: Purchasing power parities

An average price aggregation method first used by the ICP (International comparison programme) to compute PPPs (Purchasing power parities) and real 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 country quantity shares. The country PPPs are obtained by averaging the ratios of national and international prices weighted by country expenditure shares. 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 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 expenditures are subject to the Gerschenkron effect which can be large. Within the context of Eurostat and OECD comparisons, GK results are considered to be better suited to the analysis of price and volume structures across countries. The OECD publishes a selection of GK results chosen specifically for such structural analysis (2012 Methodological manual on purchasing power parities).


The Geary-Khamis method (GK 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 (2005 Methodological manual on purchasing power parities). http://ec.europa.eu/eurostat/product?code=KS-RA-12-023&mode=view Eurostat and Organization for Economic Cooperation and Development (OECD), "Eurostat - OECD Methodological manual on purchasing power parities (2005 Edition)", Methods and Nomenclatures, Office for Official Publications of the European Communities, Luxembourg, 2006European Union, Regulation (EC) No 1445/2007 establishing rules for the provision of basic information on PPPs, Official Journal of the European Union No L 336, 20.12.2007, p. 1 - 24