How Much Is That?

THREE WAYS TO COMPUTE THE "REAL" VALUE OF SWISS PRICES, 1501-present

We can access and understand the past only with a mind-set formed by today's world. Hence, whenever dealing with monetary aspects of the past, we are naturally interested in knowing what the price tag would look like today. We cannot help but ask ourselves how much it was "really" worth, and those who ignore the changing value of money do so at their peril.

In 1850, for instance, you could buy about 6 litres of wine with 1 Swiss franc. Today, however, even a very cheap bottle (0.75 litres) of Dôle will cost you about 6 Swiss francs. Clearly, a Swiss franc in 2005 is not worth as much as a Swiss franc in 1850. Consequently, when assessing the price of wine in the mid-nineteenth century, we better find an appropriate method telling us how much a franc in 1850 would be worth in today's world.

Likewise, we might wonder how costly living space "really" was during the process of rapid urbanisation some hundred years ago, or whether natural disasters in the past had as devastating financial consequences as recent storms, which are claimed to be without precedent.

Indeed, the usage of a tool for comparing prices across time is much broader still. Apart from this aspect of understanding past events or structures against the background of the world we live in - or vice versa - deflation is central to all inter-temporal comparisons of monetary aspects. No matter whether we aim at comparing the potency of an economy, productivity, income, or expenditure in consumer or state budgets across time, we depend on reliable instruments to determine "real" prices.

Presented here are three methods for making such comparisons in Swiss francs between any two years from 1501 to 2005. They are the CPI (1501-2005), the nominal wages of construction workers (1800-2005), and the GDP deflator (1851-2005).

None of these methods can be regarded as the best way of computing the "real" value of an amount of money in one year compared to another. Each of these modes of deflation has its merits and its limits. Which of the methods is most appropriate in a specific case depends on the question we want to answer and on the quality of the deflators for the given time period.

Short description of the three methods & guidelines for users

Consumer Price Indes (CPI)
Probably the most widely used approach to price deflation today is the consumer basket. In this approach, the price level at any given time is measured with a representative selection of market goods. The CPI is a good choice for estimates of purchasing power. If we are primarily interested in what people could buy with a certain amount of money, then it makes sense to use a commodity price deflator, and the CPI is representative for inflation on commodities typically bought by households.

Nominal Wages
Another standard we can use to deflate prices is labour. When doing so, we measure the price of something against the amount of labour needed to obtain it. For reasons of consistency and homogeneity we used nominal wages of masons to construct this series. The labour approach is particularly suited when we want to know how much a commodity is worth in terms of the amount of work, or time, it would take to earn its costs. Also, we can compare other wages over time with this series. Finally, as we are using wages of construction workers, it is especially well-suited for prices dealing with structure and infrastructure.

Gross Domestic Product (GDP)
A third standard useful for price deflation is the gross domestic products (GDP) or a similar aggregate. The idea here is to calculate the share of GDP a certain price represents in one year, and then calculate the price this same share would represent in another year. The GDP estimate is especially useful when trying to assess the macroeconomic importance of a transaction, as this approach will translate that transaction as a share in the economy's entire production.

Further information and citation
If you want to know more about the methodology, the construction of the time series and the sources used, please consult the following article, where the research is summarised: Roman Studer and Pascal Schuppli, “Deflating Swiss Prices Over the Last Five Centuries” Historical Methods, 41, 3 (2008), pp. 137-156. When using the conversions, please cite as indicated above.

SWISTOVAL: The Calculator to deflate Swiss prices

To make the results of this research available and usable for a broad public, I am at the moment working with programmers from the University of Bern to set up a website with an online conversion tool, which will make all conversions very, very easy indeed and will allow to compare Swiss prices across time for the first time.

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