The income groupings use Gross National Income (GNI) per capita (in U.S. dollars, converted from local currency using the Atlas method) following the same methodology used by the World Bank to determine its operational lending policy. While it’s understood that GNI per capita does not directly measure a country’s level of development or the welfare of its residents, it has proven to be a useful, readily available indicator that is often closely correlated with other, nonmonetary measures of the quality of life, such as life expectancy at birth, mortality rates of children, and enrollment rates in school. GNI measures are preferred to Gross Domestic Product (GDP) as they represent national income, as opposed to the value of domestic production. GNI therefore includes income as earned by a country’s residents, whether it originates from production within its borders, or from assets held abroad.
There are some issues associated with the use of aggregate macroeconomic indicators like GNI that users should be aware of. For instance, GNI may be underestimated in lower income countries if a large portion of economic activity comes from informal, or subsistence activities. As a broad average indicator, GNI per capita does not, for example, reflect inequalities in the income distribution within countries. Users should also note that the method used to convert local currencies to U.S. dollars is based on market exchange rates, and while the Atlas method uses three-year average exchange rates adjusted for inflation to lessen the effect of exchange rate fluctuations, it does not mitigate them entirely. An alternative would be to use purchasing power parity (PPP) conversion factors from the International Comparison Program. These factors account for differences in price levels across countries, and they are under consideration for use in World Bank country classifications in the future.
Please see the staff report “Per Capita Income: Estimating Internationally Comparable Numbers“ or the working paper “The World Bank's classification of countries by income” for a more detailed discussion of the purpose, methodology, and limitations of using per capita income, selected alternative measures, and the proposed establishment of the system for grouping countries by income.