It reacts to the economic growth and decline of constituent country economies, adjusting the prominence of their respective currencies.
The GDP values of each country issued by the International Monetary Fund in its World Economic Outlook forecast are reviewed as these figures become available and a biannual re-weighting of the benchmark basket performed.
The WOCU is used to price commodities such as bunker fuel and as a reference currency for global investors and companies seeking to mitigate bilateral exchange rate volatility.
In principle, the common denomination of bonds by issuers from different parts of the world using the WCU, as well as the greater transparency of real interest rates, will produce more efficient capital markets, as savers and borrowers around the world converge in their understanding of what each basis point of interest means and are protected against two key sources of uncertainty, namely inflation and exchange loss risks.
Unfortunately, substances that exist by the bounty of nature, such as gold or silver, cannot have such property since their values fluctuate with changing supply and demand.
This is the main motivation behind indexed units of account, of which Robert Shiller of Yale University is a principal proponent.
By definition, according to the initial proposal by Ho, the WCU represents the sum of the gross domestic products of key market economies in the world, namely the USA, the Eurozone and UK, Japan, Canada, and Australia.
While still retaining the meaning of a unit of global real purchasing power, the WCU can now be interpreted as a GDP-weighted basket of currencies, each indexed against domestic inflation.
The WCU could be used for the pricing of commodities such as oil, precious metals, and agricultural products, which are typically quoted in US dollars.