Ask Dr. Econ

October 2000

How do you calculate a nation's wealth and what different methods may be used to estimate wealth?

Let's start by defining wealth, a key economic concept. That's the easy part. Then we'll examine a couple of ways to calculate it and to use U.S. statistics on wealth published by the Federal Reserve. It is more difficult to compare levels of wealth across different countries than it is to analyze statistics for any one country, because methods of calculating wealth may vary from country to country.

National Wealth
What is wealth? To find out, the first thing you need to do is to calculate a nation's gross assets. These are often categorized as tangible or financial. Tangible, or nonfinancial assets include real assets, ranging from homes and businesses to cars. In contrast, financial assets include items such as bank deposits, corporate stocks and bonds, and tax-deferred retirement accounts.

Gross Assets = Tangible Assets + Financial Assets

Nations, like individuals, may borrow to finance purchases of their assets, so we must subtract any outstanding liabilities or debts to arrive at net worth or wealth. Liabilities include mortgages, credit card debt, automobile loans, as well as other kinds of debt.

Net Worth or Wealth = Gross Assets - Liabilities

One useful measure of wealth for the United States may be derived from the Federal Reserve's Flow of Funds Accounts of the United States, Statistical Release Z.1. The Flow of Funds provides a source of aggregate information on the wealth or net worth of U.S. households and nonprofit organizations at a point in time. Also available is detailed annual information on the gross assets and liabilities of U.S. households and nonprofit organizations. Table 1 shows a summary of second quarter 2000 wealth measures that may be used to evaluate the level of wealth in the United States (also available at the Federal Reserve Board's website: http://www.bog.frb.fed.us/releases/Z1/).

Cross Country Wealth Comparisons
A comparison of wealth across countries often requires a standardized measure of wealth that takes into account differences in population. Thus, you may wish to use a measure of wealth per capita (or per person) or on a per household basis to provide a standard measure of comparison.

Distribution on U.S. Wealth
For the United States, information on family wealth and its distribution may be obtained from the Federal Reserve's Survey of Consumer Finances (1998 and previous years). This survey of about 4,300 family units is statistically designed to provide estimates of their average and median net worth. The survey estimates the composition of assets, liabilities, and net worth of U.S. families every three years, so it may identify changes in wealth over time and new trends in family holdings of wealth.

The survey data provide measures for the United States on the distribution of wealth by a variety of demographic categories (including income, age of head of household, education level, race and ethnicity, and housing status). Thus, if you are interested in national average wealth figures at the family level, or interested in how wealth is distributed across families, you might examine the sample of results from the Federal Reserve's 1998 Survey of Consumer Finances shown in Table 2. In addition, the attached charts show the estimated 1998 distribution of the assets and debts of all U.S. families.

Distribution of Financial and NonFinancial Assets and Debt, All U.S. Families

References:

Samuelson, Paul A., and William D. Nordhaus, (1998) Economics. Boston, Irwin/McGraw-Hill, Chapter 12.

Kennickell, Arthur B., Martha Starr-McCluer, and Brian J. Surette, "Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, January 2000.

Federal Reserve Statistical Release, Z.1, "Flow of Funds Accounts of the United States," Second Quarter 2000.