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 several 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 indices depending on the context of the question.
This comparator 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 comparators 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. This website presents four additional indices besides the CPI. It also suggests that using each of these indices can be defined in more than one way, depending on the type of thing you are comparing.
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.
The Five Indices 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.
Defining the Measures
The measures of relative value presented here are computed using the ratio of the change in the indices listed above. Your initial amount is multiplied by the observed value of each index from the desired year divided by the observed value from the initial year.
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 as 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. In theory the size of this bundle does not change over time, but in practice adjustments are made to its composition. This measure uses the CPI.
Labour Value is measured as the multiple of the average wage that a worker would need to use to buy the commodity. This measure uses one of the wage indexes.
Income Value is measured as the multiple of average income that would be needed to buy a commodity. This measure uses the index of GDP per capita.
Economic Share is the worth of a commodity in a particular time period divided by GDP; it is its share of total output. This is helpful in measuring the relative value of aggregate consumption items such as all the cars made in a year.
If you are looking at an Income or Wealth , then the best measures are:
Real Wage or Real Wealth measures the purchasing power of an income or wealth by its relative ability to buy a (fixed over time) bundle of goods and services such as food, shelter, clothing, etc. This bundle does (in theory) not change over time. This measure uses the CPI.
Relative Labour Earnings measures an amount of income or wealth relative to the wage of the average worker. This measure uses one of the wage indexes.
Relative Income measures an amount of income or wealth relative to per capita GDP. When compared to other incomes or wealth, it shows the economic status or relative "prestige value" the owners of this income or wealth because of their rank in the income distribution. This measure uses GDP per capita.
Relative Output 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:
Real Cost of a project is measured by comparing its cost to the cost index of all output in the economy. This measure uses the GDP Deflator.
Labor Cost of a project is measured as a multiple of the average wage of the workers that might be used to build the project. This measure uses one of the wage indexes.
Economy Cost of a project is measured as the cost of the project as a percent of the output of the economy. This measure indicates the opportunity cost in terms of the total output of the economy. It can be interpreted as the importance of the item to society as a whole. This measure uses the share of GDP.
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 2018, the relative real price of that 6 pence is $2.06 and the labour value is almost $9.52. The income value is $16.66. The current toll on the bridge during peak time is $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 £17.7 million. 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 MeasuringWorth, this means thinking of the gold rushes as a project. There are two appropriate choices for evaluating the relative worth of such a project of £17.7 million in 1851. The first is to use the GDP deflator, a price index for all goods and services (real cost), which gives a value of $4.52 billion in 2018 prices. The second is to measure the gold rushes relative to GDP (economy cost), which gives a value of $1.96 billion. 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.
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.
The relative real cost of that 1870 budget in 2018 is $21.8 million, a sizeable but not overwhelming amount for an infrastructure project. As labour was a substantial part of the construction costs the 2018 labour cost of the budget would be $139 million in relative wages at average weekly earnings. In terms of share of GDP (economy cost) represents a relative value of $2.12 billion in 2018, 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 in 1872 of £479,174 18s. 3d in comparison represents an economy cost of $7.78 billion in 2018, 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
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. That sticker price clearly increased from £733 in 1949, so looking at it in 2018 terms we find a real price of $39,400, which is not dramatically different from the prices of current popular full sized sedan car models. In terms of labour value the price tag represents $123,000 in 2018, 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.
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 (real wage) to bring it to 2018 values results in $30,920, hardly an enticing salary. However, compared to average weekly earnings the relative income represents $301,800, a number quite in line with today's salaries for specialized medical doctors.
South Australian Advertiser, 04.01.1870
*In these examples, we use the convention that a billion is 1,000 million.
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/
Please let us know if and how this discussion has assisted you in using our comparators.