Asset (economics)
Encyclopedia
An 'asset' in economic theory is an output good which can only be partially consumed (like a portable music player) or input as a factor of production (like a cement mixer
) which can only be partially used up in production. The necessary quality for an asset is that value remain after the period of analysis so it can be used as a store of value
. As such, financial instruments like corporate bonds and common stocks are assets because they store value for the next period. If the good or factor is used up before the next period, there would be nothing upon which to place a value.
As a result of this definition, assets only have positive futures prices. This is analogous to the distinction between consumer durables and non-durables. Durables last more than one year. A classic durable is an automobile. A classic non-durable is an apple, which is eaten and lasts less than one year. Assets are that category of output which economic theory places prices upon. In a simple Walras
ian equilibrium model, there is but a single period and all items have prices. In a multi-period equilibrium model, while all items have prices in the current period. Only assets can survive into the next period and thus only assets can store value and as a result, only assets have a price today for delivery tomorrow. Items which depreciate 100% by tomorrow have no price for delivery tomorrow because by tomorrow it ceases to exist.
The subfield of asset pricing (or valuation) is the financial evaluation of the value of such assets; the primary method used by today's financial analyst
s is the discounted cash flow
method (DDM). Under the DDM, an asset's future cash flow
s are either assumed to be known with certainty (as in a Treasury Bond which is risk free) or estimated. These future cash flows are discounting used present value
s.
The Flow of Funds
tables from the Federal Reserve System
provide data about assets, which are tangible assets and financial assets, and liabilities. The difference, assets minus liabilites, is net worth.
Concrete mixer
A concrete mixer is a device that homogeneously combines cement, aggregate such as sand or gravel, and water to form concrete. A typical concrete mixer uses a revolving drum to mix the components...
) which can only be partially used up in production. The necessary quality for an asset is that value remain after the period of analysis so it can be used as a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....
. As such, financial instruments like corporate bonds and common stocks are assets because they store value for the next period. If the good or factor is used up before the next period, there would be nothing upon which to place a value.
As a result of this definition, assets only have positive futures prices. This is analogous to the distinction between consumer durables and non-durables. Durables last more than one year. A classic durable is an automobile. A classic non-durable is an apple, which is eaten and lasts less than one year. Assets are that category of output which economic theory places prices upon. In a simple Walras
Walras
Walras is surname of:* Auguste Walras , French school administrator and economist* Léon Walras * Walras' law...
ian equilibrium model, there is but a single period and all items have prices. In a multi-period equilibrium model, while all items have prices in the current period. Only assets can survive into the next period and thus only assets can store value and as a result, only assets have a price today for delivery tomorrow. Items which depreciate 100% by tomorrow have no price for delivery tomorrow because by tomorrow it ceases to exist.
The subfield of asset pricing (or valuation) is the financial evaluation of the value of such assets; the primary method used by today's financial analyst
Financial analyst
A financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis for external or internal clients as a core part of the job.-Job:...
s is the discounted cash flow
Discounted cash flow
In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
method (DDM). Under the DDM, an asset's future cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
s are either assumed to be known with certainty (as in a Treasury Bond which is risk free) or estimated. These future cash flows are discounting used present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
s.
The Flow of Funds
Flow of Funds
Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets, those showing* The aggregate assets and liabilities for financial and nonfinancial sectors, and...
tables from the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
provide data about assets, which are tangible assets and financial assets, and liabilities. The difference, assets minus liabilites, is net worth.
External links
- http://www.federalreserve.gov/releases/z1/Current/z1r-6.pdf Balance sheet tables, statistical releases of Federal Reserve SystemFederal Reserve SystemThe Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...