Five Ways to Compute the Relative Value of Australian Amounts, 1828 to the Present.

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      using:
CPI
GDP Deflator
Per Capita GDP
GDP
Earnings



1828 to 19651966 to present
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Why not 2014?

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

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

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

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

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

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

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

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

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

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

CPI
The CPI is most often used to make comparisons partly because it is the series with which people are most familiar. This series tries to compare the cost of things the average household buys such as food, housing, transportation, medical services, etc. For earlier years, it is the most useful series for comparing the cost of consumer goods and services. It can be interpreted as how much money you would need today to buy an item in the year in question if its price had changed the same percentage as the average price change.
GDP Deflator
The GDP Deflator is similar to the CPI in that it is a measure of average prices. The "bundle" of goods and services here includes all things produced in the economy, not just consumer goods and services that are reflected in the CPI.
Average Earnings
Average Earnings is a good way to determine the relative cost of something in terms of the amount of work done by the average worker that it would take to produce, or the relative time spent in work by that worker in order to earn its cost. "Earnings" here represent an estimate of the total monetary value of the compensation an average worker in full time employment would get per week. There is also an indicator based on the national minimum wage.
GDP Per Capita
The GDP per capita is an index of the economy's average output per person and is closely correlated with the average income. It can be useful in comparing different incomes over time.
GDP
The GDP is the market value of all goods and services produced in a year. Comparing an expenditure using this measure tells you how much money in the comparable year would be the same percent of all output.

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

The fare the Sydney Harbour Bridge

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.

Australian Gold Rushes

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.

Overland Telegraph Line

The Overland telegraph is a 3,200 kilometer telegraph line through the heart of Australia. Traversing the continent in North-South direction the cables were strung through the unexplored and seemingly impenetrable Outback linking Adelaide, and the existing Australian telegraph networks, with an undersea cable landing at Port Darwin. This technological feat cut the time it took to send messages from Australia to Europe from weeks to almost immediate transmission.

The colony of South Australia approved in 1870 a budget of £120,000, pre-empting other states and successfully routing the line through its territory. The initial amount however severely underestimated the required expenses as the capital costs ended up at a staggering £479,174 18s. 3d after completion of the line in 1872.

Using the GDP deflator for 1870 shows a relative value in 2015 of $20.7 million, a sizeable but not overwhelming infrastructure project. As labour costs were substantial part of the construction costs the budget would cover $131.7 million in relative wages at average weekly earnings. In terms of share of GDP the Overland Telegraph budget of £120,000 represents a relative value of $1.85 billion in 2015, a rather substantial undertaking for a (white colonial) population of barely 190,000. It's also very similar to the $1.8 billion investment of Australia's National Broadband Network Satellite program launched in 2015, which provides high-speed internet to about 400,000 Australians living in remote areas. The final bill of £479,174 18s. 3d in comparison represents a relative value of $6.78 billion in 2015, as measured in terms of share of GDP, which reinforces the substantial investment in connecting Australia to the rest of the world this telegraph line was. Australia currently invests $56 billion to bring high-speed internet to most of the country, with the cost share for the state of South Australia probably above $4 billion. Connecting Australia to the larger world was a very costly undertaking in 1872 and it is still today. Source: Frank Clune "Overland telegraph: the story of a great Australian achievement and the link between Adelaide and Port Darwin" Angus and Robertson, Sydney, 1955

The First All-Australian Car

An important moment in Australia's industrial development was the first all-Australian mass produced car. The Holden 48-215, commonly known as the "FX", was unveiled at the end of 1948 with a price tag of £733. The sticker price clearly increased but looking at it in 2015 terms we find a price tag of $37440 using the CPI measure. Using the GDP deflator results in a slightly higher value, namely $42,360, though still not dramatically different from the prices of current popular full sized sedan car models. In terms of labour costs the price tag represents $116,740 in 2015 values, using average weekly earnings, which indicates that the average worker had to work substantially longer than their modern counterparts to be able to afford such a car.
http://www.australia.gov.au/about-australia/australian-story/holden-car

Salary of a Rural Doctor

Attracting qualified medical personal to remote locations seems to have been a problem now and then. In 1870 the mining community of Yankalilla on the Fleurieu Peninsula advertised for a new surgeon as their current one had decided to move on to even more remote areas. The ad stated that the annual income of the previous resident had never fallen below £260 a year. What does that income buy today? Using the CPI to bring it to 2015 values results in $29,420, hardly an enticing salary. However, compared to average weekly earnings the income represents $285,400, a number quite in line with today's salaries for specialized medical doctors.

South Australian Advertiser, 04.01.1870

ex5:

*In these examples, we use the convention that a billion is 1,000 million.



A Project is either an investment, such as construction of a canal or installation of a cable network; or a government expenditure, such as the financing of Medicare or a war. Also within this category are such items as the size of a government budget deficit, and the total assets or net worth of a company.
Income is a flow of earnings, while Wealth is a stock of assets. Earnings might be of a specific type of labour, such as a plumber or professional athlete, or the (average) earnings of a broad group such as unskilled workers. Wealth can be a financial asset such as bank deposits or a stock portfolio, or can involve a physical asset, such as real estate.
Commodities are (usually consumer) goods and services. Examples are bread, attending a rock concert, buying fish and chips, a visit to the dentist, and personal computers.

Citation

Diane Hutchinson and Florian Ploeckl, "Five Ways to Compute the Relative Value of Australian Amounts, 1828 to the Present", MeasuringWorth, URL:www.measuringworth.com/australiacompare/

 


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