Nolan Arenado is a baseball player. Specifically, he is a third baseman for the Colorado Rockies.
Tuvalu is a Pacific island nation consisting of nine islands populated by 11,192 people (at the latest census, in 2017).
News broke yesterday that Arenado will, over the next eight years, make an average of $32.5 million per year, provided he does not opt out following the 2021 season.
The nation of Tuvalu produced a Gross Domestic Product (GDP), as reported by the International Monetary Fund (IMF), of $45 million in 2018.
What does this mean?
At surface value, one might say it means that Nolan Arenado is as economically valuable as a 72% slice of Tuvalu’s economy.
This isn’t accurate, though, for a few reasons.
To answer why, and to answer exactly how valuable Nolan Arenado is, compared to the nation of Tuvalu, we have to identify what Arenado’s salary means. We also have to identify what Tuvalu’s GDP means.
A nation’s GDP is defined, in my words, for practical purposes, as the value at final purchase of all goods and services produced in that nation in a year. In other words, it’s measuring how much economic value is generated by a country: If the collective economic action of the nation of Tuvalu—everything every person did at their job—were performed by one person, and that person was self-employed (no one else was taking a cut of the value they provided), their income in 2018 would have been $45 million.
There’s more nuance to it than that, of course, but that’s effectively what we’re measuring here. Tuvalu’s GDP measures the value of what Tuvalu’s people do.
Nolan Arenado’s salary is not such a direct measurement. It isn’t a raw measure of how much value he generates in a given year. Instead, it’s the intersection of how much the Rockies are willing to pay him and how little he is willing to accept.
To measure Nolan Arenado’s actual economic value, then, we can’t just look at his salary. Remember that caveat a few paragraphs back about Tuvalu being “self-employed”? Nolan Arenado is not self-employed. The Rockies are taking a cut.
The Rockies, according to Forbes, brought home a total of $15 million in profit in 2018. Over the last decade, they’ve averaged a similar total: roughly $16.8 million per year.
For simplicity’s sake, let’s say that all the value generated by the Rockies is generated by their players. This isn’t fully true, of course. They have a beautiful stadium capable of hosting concerts and similar events. They have a brand that holds value and generates income. Still, the argument can be made that the true source of all this value is the players. We aren’t here to debate that, and it won’t dramatically affect our calculations.
With this assumption established, let’s look at the Rockies’ total payroll. According to Spotrac, the Rockies have a 2019 25-man payroll of approximately $139 million. Nolan Arenado, in 2019, is only making $26 million, thanks to a portion of his salary being deferred, which means Nolan Arenado comprises 18.7% of the Rockies’ payroll.
Extrapolated out to their profits, and assuming they’ll make the same profit this year they’ve averaged for the last decade, Nolan Arenado will generate roughly $3.1 million in profit for the Rockies, on top of the $26 million slice he gets of what he generates.
This still might not be the most accurate way to gauge Nolan Arenado’s value. After all, part of why he commanded such a high salary (the highest annual average salary in baseball) is that the Rockies, and everyone else who analyzes such things, believes he is going to continue to be really freaking good for the foreseeable future, and might even improve. Contrarily, he’s 27 years old, so he’s probably in the early stages of his prime. When considering the possibility of future injury or future worsened performance, he might be worth more than even his average $32.5 million for 2019 specifically.
Back on the other side again, though, the longer a player is good, the more their value as a personal brand increases. Cal Ripken’s best years were long behind him as his farewell tour approached, yet he was an immensely valuable brand in his retirement season, to the point where when I personally see any sort of reference to Century 21 my first thought is about Ripken’s commercials. Economic value isn’t strictly tied to present-day on-field value.
To avoid diving into a more ambitious economic study than this blog post can support, let’s take the $3.1 million in profit Nolan Arenado generates, add it to his $32.5 million annual salary, and say that through the Rockies “channel” of Arenado’s economic production, the man is generating $35.6 million. This balances the “he’s entering his prime and might diminish” with the “he’s establishing his brand,” or at least forces the two to meet somewhere in the middle.
Nolan Arenado is not just producing value for the Rockies, though. As all athletes of his stature do, he has endorsements.
According to Forbes (again), baseball’s ten highest paid players in 2018 (Trout, Kershaw, Price, Cabrera, Cespedes, Verlander, Stanton, Pujols, Hernandez, Votto) averaged $1.1 million in endorsement revenue. Assuming Arenado is not markedly unusual, his total 2019 income will include a similar number.
Again, though, the $1.1 million doesn’t tell the full story. Arenado receives that much money from the companies whose products he endorses. The companies, thanks to his endorsement, receive more. As with the Rockies, Arenado is only receiving a slice of his total economic value. It’s likely a large slice, again, but it is still only a slice.
Presumably, the average company with which Arenado contracts on an endorsement deal is marketing to the point of diminishing returns. What this means is that the company is marketing such that every dollar spent on marketing is yielding the maximum profit. For example, if the company is allocating 24% of its budget to marketing (the average portion for a corporation in the Consumer Packaged Goods industry, according to a 2017 Deloitte study published on the website of the Wall Street Journal), it should be such that setting marketing’s portion of the budget at 23% or 25% would lessen the overall profit margin.
According to Investopedia, the average corporation in the S&P 500 yielded an 11% operating profit in 2017. Since we don’t know how profitable marketing itself is, within the breakdown of a company, but we believe it to be optimized, let’s say it yields an 11% profit. Again, this is a balancing assumption. It could be higher or lower, so we’re placing it in the middle. Given this assumption, Arenado’s estimated $1.1 million of endorsement deals (our estimate, comparing him to the ten highest-paid baseball players in 2018) are generating roughly $1.2 million in economic value. It isn’t hugely significant, but it helps our confidence in adding the figure to our calculation.
Combining that $1.2 million with the $35.6 million passing through the Rockies, it’s fair to estimate that Nolan Arenado personally produces $36.8 million of economic value. This is just an estimate, of course, and it’s one designed to hit the middle when it comes to assumptions. It may overstate or understate certain factors, but on the whole, any study of Arenado would likely come up with a similar figure.
Which brings us back to Tuvalu.
Since we focused on 2019 Nolan Arenado, it would be unfair of us to focus on 2018 Tuvalu. Thankfully, the IMF has given us a projection of Tuvalu’s 2019 GDP, and they think it’s going to be $49 million—still the smallest national economy in the world, but growing fast, and still outpacing Nolan Arenado.
So, no, Nolan Arenado is not generating quite as much economic value as the entirety of a Pacific island nation. Even if he were, that would not be a knock on Tuvalu—Tuvalu is a tiny, tiny country, and when compared on per capita terms (i.e., per person), Tuvalu’s is much closer to the median of national GDP’s. Still, Nolan Arenado is producing about 75% as much value as Tuvalu (close to the 72% figure from earlier in the article, which is not meaningless), and in an estimate with fairly large error bars, that’s close enough to compare the two.
In short, Nolan Arenado is nearly as economically productive as one specific nation. That’s impressive.
