How is Wealth Measured?
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How Wealth Is Measured
The concept of wealth as a stock of a great variety of useful things raises the question of how wealth can be measured other than by listing all such things.
Since they are heterogeneous they cannot be added to form a single total. Care has been taken, however, at least in the narrower definition, to restrict the things included in wealth to those which are bought and sold. Thus wealth can be measured as the sum of money values. A money valuation is particularly appropriate for assessing the quantity of wealth in a single total because prices measure the marginal utilities of different goods. The marginal utility of any particular goods is the increase in total satisfaction yielded by one additional unit of the good. For expressing in homogeneous terms the heterogeneous satisfactions yielded by different goods, prices provide a basis for assigning a meaningful relative importance to the various categories of wealth.
Money Value of Wealth Stock
To estimate accurately the money values of the wealth stock presents many difficulties. The value of an item of wealth may be viewed in two ways. First it can be thought of as the price which can be received for the use of the item for a restricted period of time, say a year, the item to be returned intact; or, second, as the purchase price which gives the buyer the right to use or otherwise dispose of the services of the item for the entire period of its usefulness. These two values are closely related. The purchase price, which is what is usually meant by the value of an item of wealth, is, excluding sentimental factors, nothing more than a present value assigned to an estimate of the
use value of the item for the period of its usefulness. Any present value of future services involves discounting these anticipated services at a current interest rate. Sales values of wealth are thus seen to be reflections of anticipated service values.
Book Value and Current Market Value
If each item of wealth was sold currently, the prices (market values) thus established could be taken as appropriate values. This seldom happens. It becomes necessary, therefore, to assign to the stock not sold the prices secured for the units that were recently transferred. For some items of wealth such as public roads, parks, or even many factory buildings, no representative items are transferred, so that some appraised or book value must be assigned. Book values are usually original purchase price values and these may be quite different from either the current costs of producing a similar item or the price at which the item could be bought or sold. Where marketable instruments such as stocks and bonds exist as ownership claims against the property, the market values of such instruments constitute still another basis for valuing wealth.
Current practice in wealth estimating is to secure, as nearly as possible, current market value. Even if these are obtained the task is only half over if time comparisons are to have any significance. Since the value of money changes, wealth measured in money values would not tell us whether the total of substantive wealth (useful resources) had increased or decreased in quantity. To answer this question we would have to express the totals in dollars of constant purchasing power. For this reason historical estimates of wealth often have only limited usefulness unless they provide the information by which they can be made comparable, namely, constant price valuations.
Category: Personal Finance