The Problem of Money as a Measuring Stick

A more accurate measuring instrument may be found in stable money baskets
built by computers and mathematics.

By Nikolai V. Hovanov, James W. Kolari, and Mikhail V. Sokolov

DOI: 10.1145/1925041.1925046

We measure the value of cars, homes, investments, using money. Unfortunately, money is a poor measuring stick due to the fact that the values of currencies fluctuate widely over time. Is it possible to create a better measuring stick for money? U.S. and Russian researchers develop a basket of multiple currencies that is fairly stable over time. This article shows how to make stable money and discusses it uses in measuring the prices investments as well as everyday goods and services.

 

Suppose you time a runner in a 100 meter dash but your stopwatch measures seconds in random lengths, rather than fixed intervals of time. Or what if you measure a growing child’s height with a measuring stick that changes length over time? These and many other measurement problems led to the development of accurate clocks, measuring sticks such as the meter, weighing devices, and other metrics (e.g., the speed of light) to enable accurate computation of physical phenomenon around us.

While constant measurement units
are commonplace in the sciences, their
usage in business, economics, and fi-
nance is largely ignored. For example, if
you buy a share of Apple’s stock and the
price rises, say 10 percent, over a span
on one year, you immediately infer that
Apple’s stock has increased in value.
However, you measured your Apple’s
stock prices using dollars, which itself
randomly varies in value over time. In
other words, using money as a measur-
ing stick introduces some confusion
into what really happened over the
past year. The actual fact might be that
the value of the dollar declined relative
to the value of a share of Apple stock.
Now more dollars would be required at
the end of the year to exchange for one
share of Apple than at the beginning of
the year. It is possible that Apple’s stock
did not change at all during the year, as
your 10 percent price increase is only
due to the falling value of the dollar.