Computation of parity price

Reference no: EM1311091

Parity Price is a price that maintains the ratio of prices received and paid by farmers at the same ratio as in a base year. A parity price of, say, corn, is a price of corn that keeps farmers as well off relatively as they were in a specified base year (the average of prices in the years 1920 -1914). If farmers received the parity price for corn, the ratio of the prices received by farmers for that corn to prices paid by farmers would always be the same as it was in the base year. For example, say the base year price of corn was $3 a bushel and the price paid by farmers for a composite of manufactured goods was $4. If the price of manufactured goods rises to $6 a bushel (a rise of 50%), the parity price of corn also rises by 50% - to $4.50 in this hypothetical example.

Reference no: EM1311091

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