Definition
Parity Price refers to the price of a commodity or service that is linked to the price of another commodity or service, or to a composite average of prices over a selected previous time period. In this system, price variations between the two sets of commodities or services are monitored and presented on an index number scale where the number 100 denotes the status of parity.
Examples
Agricultural Commodities: The U.S. government often uses parity price concepts to maintain the purchasing power of agricultural commodities. For instance, if the parity price of corn is set based on a prior period’s composite average, the modern price of corn would adjust to reflect current economic conditions and maintain consistent purchasing power for farmers.
Currency Markets: In international currency markets, the term parity price can apply to exchange rates. For example, if the parity price of the Euro to the U.S. Dollar is set at 1.1, this affects the exchange rate policies and purchasing power parity between these two currencies.
Interest Rate Pegging: Some financial instruments have interest rates pegged to a reference rate such as LIBOR (London Interbank Offered Rate). The interest rate of the financial instrument moves in tandem with variations in LIBOR, maintaining a form of parity.
Frequently Asked Questions (FAQs)
Q: What is the significance of the ‘100’ scale in parity price? A: The ‘100’ scale signifies the status of parity. When the index number is at 100, it indicates that the prices are at parity. Changes in prices are reflected by movements away from the 100 mark.
Q: How does parity price impact farmers? A: Parity price helps to ensure that farmers receive fair compensation adjusted for inflation and other economic factors. This helps to stabilize their income and maintain the purchasing power of their produce.
Q: Can parity prices fluctuate? A: Yes, parity prices can fluctuate based on the economic conditions affecting the prices of the linked commodities or services.
Related Terms
Purchasing Power Parity (PPP): A theory which suggests that in the long term, exchange rates should adjust so that an identical good or service costs the same amount in different countries.
Commodity Price Index: An index that tracks the price of a commodity or basket of commodities over time.
Price Pegging: The practice of fixing the price of a commodity based on another reference point, such as another commodity price or a time-based composite average.
Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Index Number: A statistical measure used to show changes in a variable or group of related variables over time.
Online References
- Investopedia Parity Price: www.investopedia.com/terms/p/parity-price.asp
- International Monetary Fund (IMF) on Purchasing Power Parity: www.imf.org/en/Research/eLibrary
Suggested Books for Further Studies
- “Commodity Price Dynamics: A Structural Approach” by Craig Pirrong
- “International Economics” by Dominick Salvatore
- “Principles of Economic Analysis” by Robert Dorfman