What is Atlas conversion factor ?

The Atlas conversion factor is a method used by the World Bank to convert a country’s gross national income (GNI) from local currency into U.S. dollars. This method is designed to reduce the impact of fluctuations in exchange rates. The Atlas method smooths out exchange rate fluctuations by using a three-year average exchange rate, adjusted for inflation differentials between the country in question and a group of high-income countries.

Key Features of the Atlas Conversion Factor:

1. Three-Year Average Exchange Rate:
   • The exchange rate used in the Atlas method is an average of a country’s exchange rate over the past three years. This helps to mitigate the effects of short-term exchange rate volatility.
2. Adjustment for Inflation:
   • The exchange rate average is adjusted for the difference in inflation between the country and the G5 countries (United States, United Kingdom, France, Germany, and Japan). This adjustment ensures that the conversion factor reflects real changes in purchasing power.
3. Purpose:
   • The main aim of the Atlas method is to provide a more stable and realistic measure of a country’s GNI in U.S. dollars, which can be used for comparisons across countries and over time. This is particularly important for international development and economic analysis.

Calculation:

1. Determine the exchange rates for the country for the past three years.
2. Calculate the average exchange rate for these three years.
3. Adjust the average exchange rate for the inflation differential between the country and the G5 countries.

Example:

Let’s assume a hypothetical country has the following exchange rates and inflation differentials for the past three years:

• Year 1: Exchange rate = 50, Inflation differential = 3%
• Year 2: Exchange rate = 52, Inflation differential = 2%
• Year 3: Exchange rate = 54, Inflation differential = 4%

1. Average Exchange Rate Calculation:
   • Average exchange rate = (50 + 52 + 54) / 3 = 52
2. Inflation Adjustment:
   • Adjust the average exchange rate by the average inflation differential. If the average inflation differential over the three years is 3%, the adjusted exchange rate is:
   • Adjusted exchange rate = 52 * (1 + 0.03) = 53.56

The Atlas conversion factor for this hypothetical country would be approximately 53.56. This adjusted rate would then be used to convert the country’s GNI from local currency to U.S. dollars, providing a more stable and comparable measure of the country’s economic output.

Importance:

The Atlas method is widely used in international economic comparisons, particularly by the World Bank, to determine eligibility for certain types of financial assistance, to make economic rankings, and to perform cross-country economic analyses. It helps in presenting a more accurate picture of a country’s economic performance by mitigating the impact of exchange rate volatility.