Five Ways to Compute the Relative Value of Australian Amounts, 1828 to the Present.
Often one knows the price, cost, or value of something in a particular ("original") year, and one wants to know the value of this money amount in another ("desired") year. There are many contexts in which such a computation might be performed. Examples include the determination of the appropriate level of deferred compensation in a legal case, updating the price of a commodity fifty years earlier, and assessment of government expenditure on health care in one year relative to another. There is no single "correct" measure, and economic historians use one or more different indicators depending on the context of the question.
This calculator performs such computations for amounts in Australian currency. The technique is as follows. (1) select a general measure of price, income, or output, and (2) multiply the money amount by the desired-year/original-year ratio of the measure. The resulting, "updated", monetary amount may be termed the "relative value" of the original amount.
The measure often used in these kind of calculators is the "consumer price index" (CPI) that is the price of a "bundle" of goods and services that a representative group of consumers buys or earns. However, there are problems with the CPI as a measure.
One problem is that the bundle changes over time. For example, carriages are replaced with automobiles, and new goods and services are created (such as personal computers, cellular phones, and heart transplants). Another problem is that the CPI is oriented solely to households, and so omits attention to business investment or government expenditure. Perhaps most important, the context of the monetary amount may lead to a measure preferable to the CPI. It is a fair statement that the CPI is used far too often without consideration of its consequences.
Until the beginning of the twentieth century, the Australia colonies were part of the British Empire and their official currency was the British pound. With Federation in 1901, the Australian government became responsible for the currency and in 1910 introduced the Australian pound (consisting of 20 shillings or 240 pence) as the nation’s official currency. Until 1931, the Australian and British pounds were officially at parity although there were small variations in the market exchange rate. In 1966, the official currency was changed to the Australian dollar (with 100 cents), at a conversion rate of one Australian pound to two Australian dollars.
Defining the Measures
The best measure of the relative value over time depends on the type of thing you wish to compare. If you are looking at a Commodity , then the best measures are:
Real Price is measured using the relative cost of a (fixed over time) bundle of goods and services such as food, shelter, clothing, etc., that an average household would buy. This bundle does not change over time. This measure uses the CPI.
Labour Value is measured using the relative wage a worker would use to buy the commodity. This measure uses the average weekly earnings or minimum wage.
Income Value is measured using the relative average income that would be used to buy a commodity. This measure uses the GDP per capita.
If you are looking at an Income or Wealth , then the best measures are:
Historic Standard of Living measures the purchasing power of an income or wealth in its relative ability to purchase a (fixed over time) bundle of goods and services such as food, shelter, clothing, etc., that an average household would buy. This bundle does not change over time. This measure uses the CPI.
Economic Status measures the relative "prestige value" of an amount of income or wealth between two periods using the income index of the per-capita GDP.
Economic Power measures the amount of income or wealth relative to the total output of the economy. When compared to other incomes or wealth, it shows the relative "influence" of the owner of this income or wealth has in controlling the composition or total-amount of production in the economy. This measure uses the share of GDP.
If you are looking at a Project , then the best measures are:
Historic Opportunity Cost of a project is measured by comparing its relative cost using the cost index of all output in the economy. This measure uses the GDP Deflator.
Labour Cost of a project is measured using the relative wage of the workers that might be used to build the project. This measure uses the average weekly earnings or minimum wage.
Economy Cost of a project is measured using the relative share of the project as a percent of the output of the economy. This measure indicates opportunity cost in terms of the total output of the economy. The viewpoint is the importance of the item to society as a whole, and the measure is the most inclusive. This measure uses the share of GDP.
There are Five Indicators Used
For more-detailed discussion of these measures, see Construction of GDP, GDP deflator, CPI, Population and Share Price Index and Australian Wages Series - Sources, Methods and Uses.
Here Are Some Examples
In 1932, the year it opened, the fare on the Sydney Harbour Bridge was 6 pence for a car (half that for horse and rider.) In 2011, the relative real price of that 6 pence is $1.93 and the relative labor price is almost $8.00. The income value is $14.00. The current fare on the bridge and the tunnel is a maximum of $4.00, so the commute is a bit more expensive in in terms of goods, but lots cheaper in relative earnings.
The alluvial gold rushes from 1851 had a major impact on the Australian colonies. In the short term there was massive disruption, with food shortages and severe inflation as workers left their jobs to go to the gold fields but, in the longer term the gold rushes transformed Australia’s growth possibilities. The total value of gold produced – mainly in Victoria - in the peak alluvial phase from 1851 to 1860 was £87m. How can we best measure the relative value of this amount?
Although gold is a commodity, the gold rushes were an economic event which lasted at least ten years and its impact is best measured relative to the economy as a whole. On measuring worth, this means thinking of the gold rushes as a Project. There are two choices for evaluating the relative worth of a project of £87m in 1851. The first is to use the GDP deflator, a price index for all goods and services (historic opportunity cost), which gives a value of $10 billion ($10,000,000,000) in 2011 prices. The second is to measure the gold rushes relative to GDP ( economic cost) , which gives a value of $3,650 billion ($3,650,000,000,000). This measure is often depicted as the opportunity cost of an event or project, but the gold rushes expanded the opportunities by attracting new migrants and capital.
*In these examples, we use the convention that a billion is 1,000 million.
Diane Hutchinson, "Five Ways to Compute the Relative Value of Australian Values, 1789 to the Present." MeasuringWorth, .
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