Using the parity / index - United Kingdom

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 United Kingdom, which cost GBP 700/m2. Use the parity values from the Parities/Index table to calculate likely costs in Yuan (CNY).

Low:

GBP 700/m2

X

5.06

=

CNY 3,542/m2

High

GBP 700/m2

X

6.5

=

CNY 4,550/m2

Average

GBP 700/m2

X

(5.06+6.50)/2

=

CNY 4,046/m2

Using the average parity value provides a most likely cost of CNY 4,046/m2.

This equates to GBP 405/m2 (CNY 4,046 / 10.00; cost / exchange rate), meaning to build in China is approximately 40 percent less expensive than in the UK. 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 GBP 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:

GBP 700/m2

X

50.6%

=

GBP 354/m2

High

GBP 700/m2

X

65.0%

=

GBP 455/m2

Average

GBP 700/m2

X

57.8%

=

GBP 405/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 11.00 CNY / GBP, not the current rate of 10.00 used for the published index value.

Average of parity range 

New exchange rate

Revised index

5.78        /

11.00      =

52.5%

If the costs are to be presented in the two currencies, the CNY cost would remain constant at CNY 4,046/m2 whilst the GBP cost to build this project would be GBP 368/m2 (GBP 700/m2 x 52.5%).

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.