THEORETICAL FOUNDATIONS OF THE GEARY METHOD FOR INTERNATIONAL COMPARISONS OF PURCHASING POWER AND REAL INCOMES

This paper provides a centenary review of the method of calculating re al incomes and purchasing power parities proposed by Roy Geary. This m ethod is the most widely used in major international comparisons, but it is often criticised for its lack of theoretical foundations. I disc uss the properties of the method and its competitors in the light of b oth practical and theoretical considerations. I also propose a new met hod of computing ''true'' or, as I call them, ''Geary-Konus'' exchange rates and world prices and I argue that the Geary method provides the best available approximation to the true values.