Saturday, December 8, 2012

How Large is the Aggregate Capital Stock?

Most people know the U.S. GDP is about $15 trillion.  GDP represents aggregate income.  But how large is total aggregate wealth.  Here is one UN study across nations.  Not only do they include physical wealth, but they also try to estimate human capital wealth -- the wealth we have due to our skills and education.  Below is from the Economist blog Free Exchange.  The UN estimates aggregate wealth in the U.S. is about $120 trillion, but three quarters of that is in human capital.  Human capital is hard to measure accurately, but it's plausibly quantitatively quite important.  Most asset pricing models in finance start with a notion of aggregate wealth and the return on aggregate wealth.  In the end, we end up assuming the return on aggregate wealth is the return on the stock market, but that may end up being a bad proxy for the return on wealth if wealth is so concentrated in human capital.  Of course, figuring out what to use instead is no simple matter.

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