Parity Index Adjusts For Exchange Rate Swings
The Faithful & Gould Parity Index is designed to clarify the international cost picture, which can be distorted by gyrations in currency exchange rates. The index is based on put-in-place rates for 26 basic items used in the construction of a manufacturing facility. The parity index value in the table shows construction costs at each location relative to Chicago. A parity of 0.78 for Great Britain implies that £0.78 of construction is equivalent to $1 of work in Chicago. To calculate a relative index value, divide the parity value of the exchange rate and multiply by 100. In this study, the U.S. dollar is used as the exchange rate for Russia.
For example, if a manufacturing facility costs $575 per sq meter in the U.S., what would be the approximate cost in Great Britain? Average parity is £0.78=$1. The answer: 0.78 x $575= £449 per sq m.
Purchasing parity provides a useful means of comparison since exchange rates can fluctuate significantly, yet the actual in-country costs of goods remain unchanged. Using parities avoids problems arising from thinking in terms of a fixed percentage difference between countries, which inevitably happens with indexes.