Choosing the Best Indicator to Measure Relative Worth

If you are asking what a monetary value is "worth", there is no single correct answer. A price or an income today, or in the past is valued in different ways by different people and under different contexts. We present here different terms that can be used to define a monetary value.

 Therefore, when talking about the (relative) worth of an item, it should be categorized as a commodity, a project, or an observation of compensation or wealth. Then (and only then) should it be measured relative to well-defined indexes of economic activity that put the item in perspective. These indexes are referred to as measures.

We suggest twelve different definitions of worth in our essay "Defining Measures of Worth." We define these different measures to help you decide the context of your query. Here are the categories and measures we use.

The Categories

There are three categories to be considered:

Commodity: Commodities in this context mean final (usually consumer) goods and services.

Project: A "project" is an expenditure that encompasses multiple commodities. It can be either an investment, such as construction of a church or new factory, or a government expenditure, such as the financing of Medicare or a war. Also, within this category are such items as the size of a government budget deficit and the total assets or net worth of a company.

Compensation or Wealth: This is a flow of earnings or a stock of wealth. It can be the earnings of a specific type of labor, such as a star athlete or an ordinary plumber, or the (average) earnings of a broad group, such as teachers.

 

Whatever the category, what is being observed must be expressible as the monetary amount of a that particular unit, and it is the worth of that unit that is to be measured. The unit must be specified precisely, but the unit is arbitrary. Conventional units are often used (e.g., a gallon of gasoline or annual gas production, one loaf or 100 loaves of bread, an hour of unskilled labor or a professor's annual salary), but an entire project or stock could be the unit (e.g., the U.S. Civil War, a government deficit, a person's real-estate holdings). Anything may be assigned a worth provided it can be expressed in monetary terms.

 

The Measures

There are four types of measures: A price index, an index of household expenditures (only for the US), an index of output, and an index of income. The indexes used for each of these measures ar, respectively, the CPI or GDP Deflator, expenditures of the average household, total output as measured by GDP, and measures of average wage and per-capita GDP. These do not comprise a complete list; there is good reason to think that other measures would be more appropriate in particular applications. The twelve presented here give a wide variety of choices.

 

This table presents the definitions we use to describe relative worth over time.

 

Table

Measuring Worth

Item

Measure

Commodity

Project

Compensation or Wealth

Price Index

Real Price

Real Cost

Real Wage (or Wealth)

Household

Expenditures (only for U.S.)

Relative Value

in Consumption

Household Cost

Household Purchasing Power

Output

Economic Share

Economy Cost

Relative Output

Income

Labor (or Income) Value

Labor Cost

Relative Income (or Labor Earnings)

 

For more discussion on how to pick the best definition to use, consult the Tutorials.

 


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