Background on comparing costs and prices across time

I often make comparisons of costs or prices across time on this blog. Doing so is difficult. I just found two resources to help understand how to do a better job.

The value of money in colonial America from the UNC School of Education explains the British currency system based on pounds. Because mercantilism was the predominant thought on how to gain wealth, manufacturing in the 1700s was done in the home country and raw materials were exported from colonies. (How much mercantilism held back the economy in the home country and every colony is a discussion for another day.)

This made manufactured goods extraordinarily expensive. Things we would think were high-priced were actually inexpensive.

For example most people could afford to buy land and build their own home but few people could afford imported sheets.

The article suggests looking at probate documents to see how things were valued. One example from a 1680 probate is “fine Holland sheets” were valued at 2 pounds 10 shillings. The frame of the bed was valued at eight shillings. At 20 shillings to the pound that would put the relative prices at 2.5 pounds and 0.4 pounds. A pair of sheets (without pillowcases) was worth 6.25 times a nice bed frame.

A visual illustration of a vaguely comparable bedroom suite might cost $1500 with the fanciest sheets available costing under $200. That would be a sheet to bedframe ratio of 0.13:1 instead of 6.25:1. is a site that tries to give several frameworks to compare worth across time.

Seven ways to compute the relative value of a US dollar amount – 1774 to present offers several ways to adjust for items over time. For example, adjusting the estimated $6.7 billion cost of the Civil War in 1860 dollars using the GDP deflator would suggest the cost in today’s money is about $140 billion. That is not a valid calculation because that gives a number that’s around one fourth our current defense budget.

If instead you compare using the size of GDP, that $6.7 billion would be around $24,800 billion, or just under $25 trillion. Add in some rough guesses on the indirect costs and adjust as a percent of GDP gives a total cost of the Civil War around $52 trillion.

Now we have something we can compare. Capitalization of the entire United States stock market is $18.7 trillion in 2012, according to the World Bank. The Civil War then cost something in the range of 2.8 times the value of all listed stocks in the U.S. today.

There are seven different indicators that could be used:

  • CPI
  • GDP Deflator
  • consumer bundle – very cool concept I’ve not seen before – the amount of money and average spending unit (is a single person, a couple, or a family on average) spends in one year
  • unskilled wage
  • compensation of production workers
  • GDP per capita
  • GDP

The site suggests using an indicator that corresponds to what you are analyzing:

  • Commodity – something a consumer might purchase such as bread, dinner, or an automobile
  • Income or wealth – the amount a person might earn from services or the value of an asset or liability
  • Project – some big thing, such as a canal or cable network that might be built

I will definitely be marking that site, and hope I can remember to go back to it.

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