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 U.K. 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 is the price of a "bundle" of goods and services that a representative group of consumers buys or earns. In the U.K. that measure is usually taken to be the "retail price index" (RPI), which corresponds to what is called the "consumer price index" in other countries.
However, there are problems with the RPI 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 RPI 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 RPI. It is a fair statement that the RPI is used far too often without consideration of its consequences.
Prior to February 15, 1971 ("Decimal day," or "D-day"), monetary amounts in the U.K. were expressed as pounds (£), shillings (s.), and pence (d.), where £1 = 20s. = 240d. After 1970, there were 100 pennies in a pound, so one (new) penny = 2.4 old pence. All numbers should be entered in decimal rather than fractional form (for example, 1.5 rather than 1 1/2).
Here Are Some Examples
Cost of the Big Ben Bell in Elizabeth Tower
Cost of Big Ben "Big Ben" was the name commonly used to refer to the clock at the top of the clock tower of the Houses of Parliament (Westminster Palace) in London. The tower was renamed Elizabeth Tower in the summer of 2012. It is also conventionally considered to be the name of the clock tower itself. Both usages are incorrect. The clock is properly termed "the Great Clock," and the tower "St. Stephen's Tower" or "the Clock Tower." Rather, "Big Ben" is the name of the giant bell weighing almost 14 tons that hangs in the Clock Tower and strikes on the hour. In fact, "Big Ben" is sometimes called "the Great Bell." The name "Big Ben" is generally considered to emanate from Sir Benjamin Hall, a
large man, who was Commissioner of Works at the time the bell was constructed. Another theory is that "Big Ben" was the nickname of a contemporary heavyweight boxer, Benjamin Caunt, and applied to the bell. Actually, the name "Big Ben" denoted an earlier bell, cast by John Warner and Sons in 1856, that cracked. The Whitechapel Bell Foundry recast the bell in 1858 using the metal from the original bell, and the name "Big Ben" was retained.
The gross charge for casting the bell was Ј2,401; but the value of the metal obtained from the earlier bell was Ј1,829. So the net cost, and the invoice submitted on May 28, 1858, was only Ј572. The relative value of that net amount in 2008 was Ј44,000 via the CPI; Ј58,800 via the GDP deflator; Ј388,600 using average earnings; Ј507,800 using per-capita GDP; and over Ј1 million applying GDP itself. For relative values of the gross cost, the figures would be increased more than fourfold (2401/572 = 4.20).
Borrowing to Purchase Shares of Suez Canal Company: In 1875 the government of Prime Minister Benjamin Disraeli borrowed £4 million from the House of Rothschild, enabling Great Britain to purchase 176,602 shares (out of 400,000 total shares) of the Suez Canal Company from the financially strapped ruler of Egypt. This transaction gave Britain ownership of 44 percent of the Company and, more important, the pretext to invade Egypt in 1882 and incorporate the country into the British Empire. It is interesting that the Rothschilds had some years earlier refused to be involved in financing the Suez Canal project. When Disraeli's private secretary, Montagu Corry, was sent as an emissary to Lionel Rothschild to request the loan of £4 million "tomorrow," Rothschild asked, "What is your security?" Corry replied "The British Government," and Rothschild responded: "You shall have it." Though this account (based on Corry's recollection) is no doubt correct descriptively, it is misleading in suggesting that the Rothschilds were surprised by the request. In fact, there is reason to believe that Disraeli had discussed the matter previously with Lionel Rothschild.
Relative value in 2008 of the £4 million borrowing was £280 and £376 million, via the CPI and GDP deflator, however, these would be inappropriate indicators to use. Relative value is £2.1, £2.5, and £4.6 billion* according to average earnings, per-capita GDP, and GDP. Given the implication of the purchase for the British Empire, relative values do not appear unduly high.
Cost of World War I: The effect of World War I (also known as "the Great War") on Great Britain was disastrous. The human, physical, and financial losses of the country were immense. For the fiscal year April 1, 1917–March 30, 1918, the war expenditures of Great Britain have been estimated as £2.5 billion. Taking this amount to apply to the calendar year 1917, the last full year of the war, the calculator yields relative value in 2008 of £840 billion using the share of GDP, the only indicator that makes sense when comparing an expense of this size. In comparison, 2008 GDP was £1,443 billion.