4.8 Deflation or calculating real values

If we use current prices to compare the prices, wages and GDP figures for different years, it is difficult to interpret the results because the value of money has changed over time. This problem can at least be alleviated by converting these values into fixed prices, i.e. into the money of each year in question. It is also possible to calculate how much wages or sales have increased in real terms, i.e. over and above inflation.

To convert the value of money at a certain period into its present day value, we use a conversion table. The conversion can be done using various different indices, most typically either the cost-of-living index or the wholesale price index. Click here to see the monthly values of the cost-of-living index 1951:10=100 and to access the conversion table.

The example below shows how to calculate the March 2003 fixed price for a commodity from different years. The calculations are based on the cost-of-living index 1951=100 (COL). The COL index for March 2003 was 1584.

We are now in the position to compare the fixed prices of different years. The sums of FIM 75,000 in 1952, FIM 1,000 in 1963 and 2,000 euros in 2002 have almost the same value when converted into March 2003 money (we have taken into account the 1963 currency reform, when two zeroes were knocked off the value of the markka and 1,000 markka became 10 markka).

Our second example here shows how to calculate the real increase in wages. Between 1990 and 2002, wage earners' nominal gross earnings went up by 47.7 per cent. At the same time consumer prices increased by 25.2 per cent. The following calculates the real increase in wages:

i.e. wages increased in real terms by 18 per cent.

Calculations of changes in real wages do not take account of changes in taxation.