Measuring the Wealth of Nations

The modern era of nation-states has generated a lot of thinking about how to measure the wealth of such places, as opposed to measuring the wealth of an individual person (and, no, let's not talk about whether nations and corporations are people!). In the early years of the Enlightenment, mercantilists thought that national wealth depended upon exports, which demanded a growing population to stimulate trade. Physiocrats believed that the wealth of a nation lay in land, not people, and that more productive land led to population growth and more exports. Adam Smith fused these and believed that the wealth of a nation was created by labor applied to the land--a combination of human and natural resources. Despite at least two centuries of thinking about these things, we much more often  compare nations on the basis of income (GDP) than on measures of wealth. World Bank researchers have been working on this problem for a while now, as I discuss in Chapter 11 of my text, but the Economist reports that the latest attempt to create a measure of national wealth has been produced by a United Nations team headed by Sir Partha Dasgupta of Cambridge University. As the authors note:

The main message is that important elements of a wealthreport do already exist, but there are significant gaps whereresearch and analysis will be required to increase the depth andbreadth of the wealth estimates. This report draws on the WorldBank measures of comprehensive wealth but goes beyond themby revising the theoretical framework and the methodology ofcomputing the various capital asset bases. These are clearly elaboratedin the data and methodological annexes presented at theend of this report.

The report is 370 pages in length so it is not for the faint of heart, but the Economist has pulled out some of the main messages. 

They included three kinds of asset: “manufactured”, or physical, capital (machinery, buildings, infrastructure and so on); human capital (the population’s education and skills); and natural capital (including land, forests, fossil fuels and minerals).

Indeed, the inclusion of "Physical" capital is one of the main differences between this measure and the previous World Bank efforts. The other important difference is the weighting given to human capital:

Officials often say that their country’s biggest asset is their people. For all of the countries in the report except Nigeria, Russia and Saudi Arabia, this turns out to be true. The UN calculates a population’s human capital based on its average years of schooling, the wage its workers can command and the number of years they can expect to work before they retire (or die). Human capital represents 88% of Britain’s wealth and 75% of America’s. The average Japanese has more human capital than anyone else.

And here's the bottom line:

By this gauge, America’s wealth amounted to almost $118 trillion in 2008, over ten times its GDP that year. (These amounts are calculated at the prices prevailing in 2000.) Its wealth per person was, however, lower than Japan’s, which tops the league on this measure. Judged by GDP, Japan’s economy is now smaller than China’s. But according to the UN, Japan was almost 2.8 times wealthier than China in 2008 (see charts).In 14 of the 20 countries studied, these increases in wealth outpaced the growth of their population, leaving per-person wealth higher in 2008 than in 1990. Germany, for example, increased its human capital by over 50%. China expanded its “manufactured” capital by an extraordinary 540%.