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Parity economics


Parity (economics), equality of status, or equivalence. In economics and business, the concept of parity is applied in a number of ways.

One way of comparing standards of living between different countries is to look at the gross domestic product (GDP) per head in terms of purchasing power parities (PPPs), which take into account the cost of living in each country. This is widely considered a better guide to living standards than simply taking GDP per head and converting it into a common currency such as the dollar. The indications the two measures give of living standards in a country can be substantially different. For example, in US dollars straightforward GDP per head in Australia and the United Kingdom is less than 50 per cent that in Switzerland, but judged by GDP per head in PPPs, living standards in the United Kingdom and Australia are more than 76 percent of the level in Switzerland.

The term parity is sometimes used in the context of exchange rates. When the gold standard was in force under the Bretton Woods agreement that governed exchange rates of International Monetary Fund (IMF) members for nearly three decades after World War II, the mint parity was the exchange rate between two currencies in relation to how much gold each could buy. For example, if £1 bought the same amount of gold as $2, the mint parity was £1=$2.

The notion of parity also figures largely in pay negotiations when a group of workers seeks parity of pay and/or conditions between its members and those belonging to another group. The grounds for seeking parity may be to correct what the group perceives as an injustice that has always existed, or it may be that because the nature of the jobs the two groups do has changed to such a degree that the original justification for the pay differential no longer exists. Not surprisingly, requests for parity always involve an increase in pay or an improvement in conditions. In certain circumstances, pay parity is enshrined in law; many countries have passed equal pay legislation that requires that women should have parity of pay and conditions with men who are doing an equivalent job.