Defining exchange rate parity in terms of GDP per hour of work

Abstract

Present methods of defining currency exchange rates are complex, obscure, and biased in favor of developed countries. The 1980 International Comparison Project revealed the bias and provided a criterion for an unbiased definition of exchange rate parity. The definition proposed here is Gross Domestic Product per hour of work estimated by GDP in billions of national currency units divided by total population in millions of persons. GDP per hour of work defines exchange rate parity the way standards of weight and measure are defined, namely, with an objective criterion. The validity of GDP per hour of work as a standard of exchange rate parity is supported by strong correlations with ICP commodity price levels in 1980 and with IMF exchange rates in 1950, 1960, 1970, 1980, 1985 and 1993. GDP per hour of work makes the definition of exchange rate parity fair, objective and visible, simple, free, timely, and independent of any reference currency. The gradual movement of exchange rates toward GDP per hour of work would encourage fair trade, a precondition to free trade, to benefit all countries.