Riddle #1: Are you better off if your wealth increases?
Julia owns shares in a company which pays her a dividend of 100,000 a year. She spends all of her dividend income. At an interest rate of 10 percent, the market value of her wealth is 1 million. When the interest rate falls to 1 percent, her wealth goes up to 10 million.
How much better off is Julia?adapted from Ben Moll: https://benjaminmoll.com/wp-content/uploads/2020/06/HKS_comment.pdf
Riddle #2: Are you better off if the price of your house increases?
Joe lives in a house worth 1 million. He has borrowed 1 million at 10% interest to finance the house purchase. Due to a sudden increase in demand for local houses, Joe’s house rises in value to 1.2 million.
How much better off is Joe?
The obvious answer is wrong. Ben Moll has the correct answers in this short paper.
The point: Wealth isn’t welfare. Wealth statistics (and a fortiori wealth distribution statistics) are often misleading.
(Here’s a graphical clue:)