How Is Wealth Defined and Measured? A Comprehensive Guide

What Is Wealth?

Wealth is the total value of all assets, including tangible items like property and intangible assets like investments, minus any debts. It can be measured in absolute terms, showing total value, or in relative terms, comparing one’s wealth to others using market values. Unlike income, which is a flow of money earned over time, wealth represents all of an individual’s accumulated resources at a given moment. Understanding how wealth is defined and measured is important for financial planning, assessing economic well-being, and making informed investment and policy decisions.

Key Takeaways

• Wealth is calculated by subtracting all debts from the market value of physical and intangible assets owned.

• Net worth, a common measure of wealth, is calculated as assets minus liabilities.

• Wealth contrasts with income, as wealth is a stock variable and income is a flow variable.

• Wealth can be expressed in various forms such as money, land, or commodities like wheat and livestock.

• People’s perception of their well-being often depends more on their wealth relative to others than on absolute wealth.

Investopedia / Theresa Chiechi

Exploring the Nature and Significance of Wealth

Wealth can be expressed in a variety of ways. Materially, wealth includes all the real resources you control. Financially, net worth is the most common expression of wealth.

Definitions and measures of wealth have been different over time among societies. In modern society, money is the most common means of measuring wealth. Measuring wealth in terms of money is an example of money’s function as a unit of account. External forces affecting money’s value can impact wealth measurement, but using money offers a standard for comparison.

Otherwise, land and even livestock can be used to measure and evaluate wealth. The ancient Egyptians, for instance, once measured wealth based on wheat. Herding cultures have often used sheep, horses, or cattle as measures of wealth.

Measuring Wealth: Methods and Considerations

Measuring wealth in terms of money overcomes the problem of evaluating wealth in the form of different kinds of goods. You can add or subtract these values. This, in turn, permits the convenient use of net worth as a measure of wealth. Net worth is equal to assets minus liabilities. For businesses, net worth is also known as shareholders’ equity or book value. In commonsense terms, net worth expresses wealth as all the real resources under one’s control, excluding those that ultimately belong to someone else.

Wealth is a stock variable, as opposed to a flow variable like income. Wealth is the value of economic goods at one point in time. Income is money or goods obtained over time. Income represents the addition to wealth over time (or subtraction, if it is negative).

A person whose net income is positive over time will become increasingly wealthy over time. For countries, gross domestic product (GDP) can be thought of as a measure of income (a flow variable), though it is often erroneously referred to as a measure of wealth (a stock variable).

Anyone who has accumulated a large quantity of net worth can be considered wealthy, but most people think of this term in more of a relative sense. Wealth, whether in money, net worth, or commodities like wheat or sheep, varies among people and groups. We use relative differences in wealth to define who is wealthy.

Research has consistently shown that people’s perception of their own well-being and happiness depends much more on their estimates of wealth relative to other people than on absolute wealth. This is also part of why the concept of wealth is usually applied only to scarce economic goods; goods that are abundant and free for everyone provide no basis for relative comparisons across individuals.

Fast Fact

The United States is home to many of the world’s wealthiest people, including 735 billionaires.

Arkansas-based retailer Walmart is one of the wealthiest corporations in the U.S., with annual revenue exceeding the GDP of many countries. In 2023, it reported $611.3 billion in revenue, ranking first on the Fortune 500 list.

$247.8 billion

The net worth of the world’s wealthiest person, Tesla/SpaceX CEO Elon Musk, as of August 19, 2024.

Amazon, another wealthy company, earned $575 billion in 2023, placing second on Fortune’s list.

How Do You Build Wealth?

To build wealth, one must allocate a portion of their income to savings and investments over time.

How Much Wealth Does the Top 1% Own?

The top 1% of wage earners hold 30.4% of wealth in the United States as of August 19, 2024.

What Is Wealth Management?

Wealth management refers to the financial, investment, and advisory services provided to clients with a high net worth.

What Is Generational Wealth?

Generational wealth are the assets passed down through successive, familial generations.

What Is the Great Gatsby Curve?

The Great Gatsby Curve illustrates the relationship between income inequality in a country and the potential for its citizens to achieve upward mobility. Graphs that depict these two variables suggest a strong positive correlation between inequality and a lack of upward advancement from one generation to the next.

The Bottom Line

Wealth is the total value of all assets a person owns, including physical and intangible assets, minus any debts. It is a stock variable, unlike income, which is a flow of money over a period. Wealth is commonly measured as net worth, calculated by subtracting liabilities from assets. It can be expressed in monetary terms or in commodities, depending on the society and time period. Wealth can be considered in absolute terms or relative to others, and it provides greater access to opportunities, helping improve financial outcomes.