Measures of Worth

Lawrence H. Officer and Samuel H. Williamson

Clearly, intrinsic values, objects, or events are difficult, if not impossible, to measure in money terms. There is probably no objective way of assessing the worth of freedom of speech or of the love of your life or of a beautiful sunset. Such items lack a well-defined money amount associated with them. Therefore we do not attempt to measure the worth of such items. Also, we cannot measure the worth even of an item associated with a money amount, if the time period (say, year) of that money amount is not clearly established. What is the worth today of "a loaf of bread produced or consumed sometime in the past"? Such an incompletely phrased question cannot be answered.

We are concerned with measuring the worth of items with which both a monetary value and a past time period are clearly associated. Examples are: A loaf of bread sold for seven pennies in 1915; what is its "value" today? Your great-grandfather's estate was $1000 or £200 in 1900; what is that worth today?

Undoubtedly, the worth of such monetary amounts is also difficult to measure. However, as long as a purchase, wage, or any transaction, or wealth or other asset has an associated monetary amount and date recorded, there is hope.

In most cases, if the transaction takes place today or the asset is in existence today, and if the money amount involved is in a range with which we are accustomed, then this discussion is considered trivial. In that case, we consciously or subconsciously, compare the transaction or asset amount with similar transactions or assets. This is an application of what economists call "opportunity cost". For example, the £10 or $20 that one pays for a hard-covered book is "worth" any one of a multitude of other things that we know costs that same amount, be it a DVD, nice bottle of wine, or a clock radio.

When the transaction or asset is not in a range we with which we are familiar, such as 100 million dollars or pounds, or if the transaction or asset occurred or existed in a time different from that in which we live or can remember, then it is much harder to "know" the comparables. There is yet another problem: one person's "comparable" could be quite different from that of another person. The worth of an amount of money sufficient to buy enough macaroni and cheese to last a week for a very poor person could be merely a tip to a doorman for a wealthy one.

The technique we use is to apply alternative monetary scales or indicators from the desired (later or present) year to an item in the initial (past) year. The result (for each alternative) is a value that has been adjusted (usually increased) by the growth in the indicator. This is the meaning of relative worth over time. Always remember that it is the item in the initial year for which the relative value is calculated. That item, or even something comparable to it, may not exist in the desired year. No matter; relative worth of the past item is still computable.

Because of these issues, we created a set of "measures of worth" that depend on two things: (1) the type of transaction or asset, called the "subject" and (2) the appropriate comparable, called the "indicator". Which measure (that is, which of the alternative results) is best depends on a proper identification of both the subject and the indicator.

Indicators

While there can be a large number of indicators, we present six common ones here, that can be classified into four types.

1. Prices. There are two general price indicators used here, the consumer price index (CPI) and the gross domestic product (GDP) deflator. The CPI, or the retail price index (RPI), involves a bundle of commodities confined to consumer goods and services. This bundle is a fixed amount of food, housing, clothing, entertainment, etc., that is proportional to what the average household consumes. The GDP deflator involves a bundle of commodities that incorporates all output in the economy including consumer goods and services, investment goods, and government-provided goods and services.

The CPI or RPI is obtained via direct index-number construction, based on surveys of household expenditures and prices of consumer items. The GDP deflator is computed as the ratio of nominal GDP to real GDP. The CPI, RPI, and GDP deflator increase over time, in line with inflation.

2. Household Consumption. The CPI measures the cost of a fixed bundle of household consumption. However, over time, incomes grow and the amount households spend increases. The Value of the Household Bundle (VHB) is the measure of the total amount that the average household spends on goods and services in a given year. Over time this indicator increases for two reasons: households both purchase more consumables (higher standard of living) and the prices of consumables increases (inflation).

3. Income. There are two income indicators: the wage and per-capita GDP. Wage is compensation for labor. Per-capita GDP is economy-wide total output divided by population. Because only part of output goes to labor, per-capita GDP is generally larger than average wage.

4. Output. The total output of an economy is measured by Gross Domestic Product (GDP), the market value of all goods and services produced in a year.

Subjects

There are three classes of subjects:

A. Commodity. A good or service, usually purchased by a consumer. In this category are such items as bread, a restaurant meal, an automobile, a tax paid, or a charitable contribution.

B. Income or Wealth. A flow of income (wages, profits, interest, rent) or wealth (a financial or real asset or liability).

C. Project. A business or government investment (such as construction of a canal or installation of a cable network) or a government expenditure (such as financing social security or a war). Certain consumer or non-profit expenditure, such as creation of a charitable foundation, can also be defined as a project.

Measures of Worth

SUBJECTS	INDICATORS
	Price Index	Value of Household Bundle	Income	GDP
Commodity	(1) Real price	(2) Real value	(3) Labor or income value	(4) Share
Income or Wealth	(5) Historic standard of living	(6) Contemporary standard of living	(7) Economic status	(8) Economic power
Project	(9) Historic opportunity cost	(10) Contemporary opportunity cost	(3) Labor or income value	(4) Share

(1) Real Price measures a subject (a commodity) against the cost of a bundle of goods and services that in principle is fixed though in practice varies over time.

(2) Real Value measures a subject (a commodity) relative to the "value of the household bundle" (VHB).

(3) Labor Value or Income Value measures a subject (commodity or project) against a specific wage or more-general income, such as the average wage rate or per capita GDP.

(4) Share measures the consumption or production of a subject (commodity or project) against the output of the economy as measured by GDP, that is, the given monetary amount is computed as a percent of GDP. This measure indicates opportunity cost in terms of the total output of the economy. The viewpoint is the importance of the item to society as a whole, and the measure is the most aggregate of all the measures. One would rarely use this measure for a commodity. The exception would be if the amount (of the commodity) was a significant share of GDP, such as potatoes in Ireland in the mid-19th century.

(5) Historic Standard of Living measures a subject (income or wealth) against the cost of a "fixed" bundle of consumer goods and services (the CPI or RPI) or the cost of all goods and services (the GDP deflator.)

(6) Contemporary Standard of Living measures a subject (income or wealth) against the value of the household bundle (VHB).

(7) Economic Status measures a subject (income or wealth) relative to a wage or more general income, such as the wage rate of workers in manufacturing or per-capita GDP. Note that the specific measures are identical to those in measure (3) above, but the kinds of subjects differ.

(8) Economic Power measures a subject (income or wealth) against the total output of the economy, measured by GDP. What is being addressed is the "economic power" of the person to whom the item pertains, the ability to influence the composition or total-amount of production in the economy (GDP).

(9) Historic Opportunity Cost measures a subject (generally a project) against a bundle of consumer goods and services (via the CPI or RPI) or a bundle of all goods and services (using the GDP deflator.) For a project of a person or household, the CPI or RPI is preferred. For investment and government projects, the GDP deflator is more appropriate.

(10) Contemporary Opportunity Cost measures a subject (always a project) relative to the VHB. Although the VHB, the average expenditure of households, is the measure, the project-item may pertain either to business/government, a person/household, or to a nonprofit institution.

Examples from 1931

In this section we report the relative worth of three subjects in the United States in 1931, the "initial year". The year 1931 is selected because it was a year of a memorable event: completion of construction of the Empire State Building, in New York City. For 40 years, this structure was the tallest building in the world. Also, 1931 is a year far enough in the past so that most of us have no memory of it and therefore cannot think in terms of what he or she remembers "things cost then".

The Empire State Building is clearly a "project". The other subjects are mundane: a loaf of bread (a commodity) and the earnings of an accountant (an income). The table below summarizes the relative worth of these 1931 subjects in 2009 (the "desired year").

SUBJECTS (Price in 1931)	INDICATORS
	Price Index CPI GDP deflator	Value of Household Bundle	Income Unskilled wage Production Worker Compensation GDP per capita	GDP
Loaf of Bread (7.7 cents)	$1.08 92 cents	$2.42	$3.24 $3.93 $5.79	$14.30*
Accountant's salary ($2,250)	$31.700 $27,000	$70,700	$94,800 $115,000 $169,000	$419,000
Empire State Building ($41 million)	$578 million $490 million	$1.3 billion	$1.7 billion $2.1 billion $3.1 billion	$7.6 billion

*    This may not be a useful answer, although it is interesting to know that a loaf of bread was a much larger share of output in 1931 than bread is today.

In 1931, a one-pound loaf of white bread, on average over several major cities, was priced at 7.7 cents. Regardless of how much money someone has, the relative cost of the 1931 loaf of bread in terms of food or household items is about a dollar today (using the CPI index).

If you are interested in comparing how much of the average shopper's budget went for bread, then $2.42 (which uses the "value of the household bundle") would be the appropriate figure.

Finally, if you were trying to figure out the amount of income from which people purchased a loaf of bread, then $5.79 is the answer for the average person. For the unskilled worker then, the purchase cost in today's money is about $3.24. For a production worker, $3.93. Remember, we are taking today's income or wage scale back to 1931 to look at the price of a loaf of bread.

The average earnings of an accountant were $2,250 and in terms of what goods and services an accountant could buy in 1931, he (there were few women accountants) received a historic comparative purchasing power of $31,700 in current dollars (using the CPI index).

His contemporary standard of living was over twice that amount, or $70,700. This is about 40 percent more than the average household bundle today, showing a high buying power.

Finally, with his $2,250 salary, the accountant enjoyed an economic status of close to $170,000 in current terms and an economic power of close to $420,000. The interpretation is that his wage enabled him to go to the same country club as someone today earning $170,000 and that he would be perceived to have the same economic influence as someone with a current annual income of a almost half a million dollars.

The Empire State building, a giant of a structure in its day, was built at a cost of $40,948,900. This may seem inexpensive in today's terms when we compare its cost using the GDP deflator and determine a contemporary cost of $490 million.

Alternatively, the cost in terms of the goods and services the average household implicitly gave up, was $1.3 billion in today's money and the "labor" value of the building was $2.1 billion in today's production worker wages.

Finally, if you want a current-dollar indicator of how important the building was compared to other projects in New York City when the Empire State Building was completed, then a number close to $7.6 billion is the best number.

All the measures discussed here first appeared in our article "Better Measurements of Worth", Challenge: The Magazine of Economic Affairs, Vol. 49, No. 4 (July/August 2006), pp. 86-110.

We acknowledge a great intellectual debt to Adam Smith, who in 1776 (in The Wealth of Nations) wrote:

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people... But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated... Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour.

Adam Smith also saw the "power" concept of worth. He states: "a great fortune... The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market".
[italics added by us]

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Please let us know if and how this discussion has assisted you in using our comparators.