Limitations of the Exchange Rate Method
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This chapter explains the exchange rate method, which was widely applied in the international comparison of GDPs before the PPP method became popular. The exchange rate method divides the GDPs of countries that are expressed in the local currency by the exchange rate and then converts the results into the benchmark currency (e.g., US dollar) for comparison. It has some inherent contradictions due to differences in prices, degrees of monetization, and marketization, availability of products in international trading, statistical scopes, coverage of service industry data, and fluctuations in the exchange rate. This chapter also introduces two commonly used exchange rate methods—the ATLAS and price-adjusted rates of exchange (PARE) methods—in calculating national GDPs. Finally, it discusses the premises of using the exchange rate method.