Using the parity / index - North America

Using the Parity / Index

Essentially, there are two approaches to using the parity/index to compare costs at different locations when one location involves the base country. Use the parity value to calculate costs in the national currency of each country. Use the index value to calculate the cost in the currency of the index base country.

Illustration 1 – costs in a local currency

Assume you need the compare the cost of a proposed manufacturing facility in China with a similar recently completed project in the US, which cost USD 1,000/m2. Use the parity values from the Parities/Index table to calculate likely costs in Yuan (CNY).

Low:

USD 1,000/m2

X

3.44

=

CNY 3,440/m2

High

USD 1,000/m2

X

4.42

=

CNY 4,420/m2

Average

USD 1,000/m2

X

(3.44+4.42)/2

=

CNY 3,930/m2

Using the average parity value provides a most likely cost of CNY 3,930/m2.

This equates to USD 623/m2 (CNY 3,930 / 6.31; cost / exchange rate), meaning to build in China is approximately 40 percent less expensive than in the US. This example uses the exchange rate from the Parities/Index table. It is possible to use a different exchange rate.

Illustration 2 – costs in index base currency

Introducing the exchange rate with the parity calculation illustration clearly shows the relationship between parity and index. The index is simply the parity value restated through currency exchange into a single currency. It allows comparison in the base location currency in one step.

To ascertain the USD rate per square meter for a project in China simply use the index value from the Parities/Index table as follows. Note that the index is expressed in a percent format.

Low:

USD 1,000/m2

X

54.5%

=

USD 545/m2

High

USD 1,000/m2

X

70.1%

=

USD 701/m2

Average

USD 1,000/m2

X

62.3%

=

USD 623/m2

In the event a different exchange rate is required, say due to fluctuations in the currency markets or fixed internal company international exchange rates, the index can be adjusted. The example below assumes a revised exchange rate of 6.50 CNY / USD, not the current rate of 6.31 used for the published index value.

Average of parity range 

New exchange rate

Revised index

3.93        /

6.50      =

60.5%

If the costs are to be presented in the two currencies, the CNY cost would remain constant at CNY 3,930/m2 whilst the USD cost to build this project would be USD 605 /m2 (US$1,000/m2 x 60.5%).

In summary, parity enables the identification of the cost for the same building in different locations in local currency whilst the index enables the direct comparison of costs for the same building in different locations in a single currency.