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Why use GNI per capita to classify economies into income groupings?

The income groupings use GNI per capita (in U.S. dollars, converted from local currency using the Atlas method) since they follow the same methodology used by the World Bank when determining it’s operational lending policy. While it is understood that GNI per capita does not completely summarize a country’s level of development or measure welfare, it has proved to be a useful and easily available indicator that is 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.

There are some limitations associated with the use of GNI that users should be aware of. For instance, GNI may be underestimated in lower-income economies that have more informal, subsistence activities. Nor does GNI reflect inequalities in income distribution. Users should also note that the Atlas method used to convert local currencies into a common U.S. dollar is based on official exchange rates, which do not account for differences in domestic price levels. The Atlas method, with three-year average exchange rates adjusted for inflation, lessens the effect of exchange rate fluctuations and abrupt changes, but an alternative method would be to use the purchasing power parity (PPP) conversion factors of the International Comparison Program. To date, however, issues concerning methodology, geographic coverage, timeliness, quality and extrapolation techniques have precluded the use of PPP conversion factors for this purpose.

Please see the staff report “Per Capita Income: Estimating Internationally Comparable Numbers,” presented by the World Bank’s Executive Directors in 1989, which discusses in more detail 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.

More information on the Bank's operational lending terms is given in Operational Policy 3.10.

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