Trying to wrap one's head around the buying power of a dollar in different time periods is never easy:
Determining the relative value of an amount of money in one year compared to another is more complicated than it seems at first. There is no single "correct" measure, and economic historians use one or more different series depending on the context of the question.
Most indices are measured as the price of a "bundle" of goods and services that a representative group buys or earns. Over time the bundle changes; for example, carriages are replaced with automobiles, and new goods and services are created such as cellular phones and heart transplants.
These considerations do not stop the fascination with these comparisons or even the necessity for them. For example, such comparisons may be critical to determine appropriate levels of compensation in a legal case that has been deferred. The context of the question, however, may lead to a preferable measure and that measure may not be the Consumer Price Index (CPI), which is used far too often without thought to its consequences.
The example below of what Babe Ruth's salary was "worth" can demonstrate this point. His earnings had a "purchasing power" in today's price of a million dollars, but he could not purchase any effective cure for cancer. However, if the question was how to compare his salary with that of a current super star such as Tiger Woods or Barry Bonds, using Ruth's wage compared to an unskilled worker, the average income or the percent of Gross Domestic Product (GDP) he earned gives comparable numbers."What is its Relative Value in U.S. Dollars" from the Economic History Services
So let's put it in context by considering one of the most famous ad jingles (listen) of all time. That would be the 1939 ad from Pepsi-Cola touting the benefits of their "superior" formulation of sugar water:
At about the same time Pepsi-Cola launched what was to become one of the most famous jingles ever written. "Nickle, Nickle" (later known as "Pepsi-Cola Hits the Spot") was written by Alan Bradley Kent and Austen Herbert Croom-Johnson.
Pepsi-Cola hits the spot
Twelve full ounces, that's a lot
Twice as much for a nickle, too
Pepsi-Cola is the drink for you.
This little jingle would go on to be recorded in 55 different languages, over 1 million records containing this jingle were produced, and it was the first jingle ever played from coast to coast on network radio. It is hard to convey just how big this jingle was, but it was very popular for nearly a decade and was even described as "immortal." How many people decided to give Pepsi a try because of this jingle can not be over estimated. The jingle was first written as a standard commercial with the jingle at the end but Mack insisted that only the jingle be aired. It was played so often that 50 years later there are still people who remember the words.The History of Pepsi-Cola, Soda Museum
Now, let's consider what the "Twice as much for a nickle, too" means in today's dollars: (BTW: the "twice as much" referred to Pepsi-Cola's twelve ounces versus Coca Cola's six.)
In 2003, $0.05 from 1940 is worth:
$0.65 using the Consumer Price Index5 cents scaled from 1940 dollars to 2003 dollars
$0.54 using the GDP deflator
$1.39 using the unskilled wage
$2.46 using the GDP per capita
$5.42 using the relative share of GDP
And $0.65 is just about what it would cost you to buy a soda today at a supermarket. (Not quantity one in a bodega, of course.) Notice how the CPI is spot on. Yet not everthing scales so nicely. Consider today's value for a home purchased for $50,000 in 1970:
In 2003, $50,000.00 from 1970 is worth:
$237,137.93 using the Consumer Price Index$50,000 scaled from 1970 dollars to 2003 dollars
$191,863.42 using the GDP deflator
$248,964.68 using the unskilled wage
$373,282.77 using the GDP per capita
$528,834.86 using the relative share of GDP
Inflation in real estate better tracks the change in Gross Domestic Product (GDP) per capita than it does changes in the CPI or wages. That's why a home that was affordable in 1970 requires three salaries to pay for in 2005. That's likely because commodities benefit from improvements in supply and manufacturing not to forget competition, which keep the price down. Real commodities, however, tend to be priced according to the owner's share in the American Dream, aka GDP. What? Your share of GDP hasn't kept pace? Well, that's all the fault of the tax-and-spend Democrats; all the "fiscally-conservative" Republicans got their share of GDP, now didn't they.
Buy land, 'cause they ain't makin' it no more.
— Will Rogers
Sources and Further Reading
- "What is its Relative Value in U.S. Dollars" from the Economic History Services
- "How Much is That" from the Economic History Services