Business writers, please stop comparing market value to GDP
cjr.org
cjr.org
The comparison is straightforward: If a country with a trillion-dollar GDP could put all its useful effort into constructing a company, they'd produce a company like Apple once a year.
Is that some kind of insane conflation? No one thinks it's actually possible for a country to produce a company as an output. It's just a way to describe the approximate order of magnitude of two things - the valuation of a company, and the yearly output of a nation.
Where you go wrong is saying that no one is confused. Articles writer themselves are often confused or write in confusing way.
The direct comparison of Apple market cap (stock) to country GDP (flow) is invalid.
(EDIT: noting GDP is a flow measure)
It's not too different from the other "really important" point this article makes: $1trn is not more remarkable than $999.99bn. Profound.
Imagine going to some online Q&A and asking a "piece of string" question: "How much does it cost to film a documentary?"
You can bet a shilling that one of the first comments will be "stupid question. It depends." It's easy. It's obvious. It'll get some karma. In person it would be a little power play, because you are correcting/berating. Online, it's a little troll.
Even if it isn't trolling, it is a boring tangent. Who cares if the analogy is optimal.
BTW (2 tangents and we get back to topic)... This is interesting (to me)
"No one think it's actually possible for a country to produce a company as an output." In some senses, they do. That is, companies exist now that did not exist previously. The company itself and stock in that company is a sort of "product." When politicians say they want jobs, economic growth and such... Are they saying the economy should output more companies.
There are relationships between revenues, profits and market cap so it'll always be possible to represent it the other way if we want. Still...
How long is a piece of string? To be useful, at least a few inches. A common task, sewing a button, needs about 12". Most string in a store is 200 yards long, but this is enough to do many things. String longer than that is very rare.
The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.
This is quoted from Wikipedia, so you might as well read the rest of the section: https://en.wikipedia.org/wiki/Gross_domestic_product#Limitat...
And here's a historical overview: https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/
Technical people are telling laypeople that X is useful. X isn't useful on its own because (1) it's wrong, not just inaccurate and (2) even if conceivable as an oversimplification of a complex issue, it misleads people. It leads them to think Apple is like a country or worse that countries are like companies.
This is how we get to "Brawndo, it's what plants crave".
Technical oriented persons love to be correct, hence the famous joke : https://i.kym-cdn.com/photos/images/newsfeed/000/909/991/48c...
But if you ever sale or teach something, you quickly realize that being correct is not nearly as important as being understood. And being understood is, itself, not as important as being accepted.
- Other companies, specially smaller ones (worth 15 Trader Joes or soemthing);
- The Apollo program;
- The cost of wars;
- Etc.
Level 1: GDP is gross domestic product. It's not adjusted down for depreciation in order to be the Net domestic product. The proverbial Chaplinian window-breaker who sells windows adds to GDP, but not to NDP.
Integrating the net domestic product over time would get you something like the accumulated wealth of a country.
Level 2: There's a differentiation between the gross domestic product and the gross national product. GDP means within-borders; this includes for example the income of migrant workers who remit cash to their families abroad. GNP means by-national-citizens (and companies); many American companies have operations abroad, for example.
Level 3: Integrating a company's (discounted expected) net revenue will give you its market value, roughishly. But what constitutes a country's net revenue is murkier. It would seem that countries who are net importers are in the red, but imported goods generates consumer welfare that's not easily accounted for. To the extend a national economy can even have goals (it cannot), it isn't to maximize net exports.
It goes on.
In discrete time increments, your running velocity is an aggregate of how much you walked over an hour. Or something.
The 'valuation' of a company is basically the present value of all it's estimated future cash flows (edit: by this I mean profit).
So think of Apple like a 'cash machine' - and it spits out profit to the bank account.
Well - the 'valuation' is just how much we think will be in that bank account.
The inherent problem with this is 'seeing the future' - both in terms of predicting future cash flows way out ... that's obviously hard, but the second part ... is the fact that the value of 'future cash flows' to you might be different than it is to someone else!
Basically, the way we calculate the 'present value' of those future cash flows is by discounting those values by some amount - $100 in 100 years is worth less than $100 tomorrow.
But what 'discount rate' do you use? That's another hard question. Typically, it's the 'risk free rate' i.e. the rate of return you can get on your money by parking it somewhere and doing nothing.
Another term for that is 'cost of capital'. Everyone's 'cost of capital' is different.
So when everyone takes there estimates of 'future Apple cash flows' and then applies their specific 'discount rate' - we then have a balance of supply and demand for their shares and voila - a 'market cap'.
Also we should point out that this is private wealth - and that massive surpluses in one part of the value chain isn't necessarily healthy for you, for me, for anyone else, or 'the economy'.
For example - what if Apple had more competition? Well, then we might be getting the very same great Apple products for 20% less. Apple might be making 'very little profit' but nevertheless be providing you and I with vast consumer surpluses.
In a funny way - every dime that a corporation makes in 'profit' is a dime that you and I (as consumers) are losing out on in terms of consumer surplus.
?? A company could have huge future cash flows yet operate with zero profit, or with a loss.
Maybe you're referring to the Dividend Discount Model of valuation. In that case the only flows that are discounted to present value are the future dividends paid to shareholders, which are tiny subset of a company's future cash flows. https://en.wikipedia.org/wiki/Dividend_discount_model
There's so much loose and confused use of terminology in threads like this generally, that I tend to think they're unhelpful to the majority of people who read them.
What I'm articulating is not complex or obscure or even really very theoretical - it's literally the most basic idea for valuation, though admittedly the term 'cash flow' might be misleading in the context of accounting.
'The company is worth how much money it will eventually put in the bank i.e. how much profit it accumulates'.
That's it.
Dividends are a separate thing and technically have no effect.
If a company pays you a $1 dividend, then you have $1. If a company keeps that $1 for you in it's bank account ... well, you have ownership of that $1. So it's a matter of accounting, not of valuation. Pragmatically, there are differences but theoretically dividends don't matter.
Pension investment pools aside, the world would more easily weather the immediate passing of Apple than Amazon or WMT.
They're all made up numbers, Jim. Comparing them just amplifies the stupid.
All numbers are made up.
But debt is counted in dollars, and GDP in dollars per year, so crossing 100% just meant adding a few days to the time it would take the US to pay back its debts. It's now at around 104% - or, more meaningfully, around 380 days - and nothing much has changed.
How exactly would a government that prints USD have trouble repaying a loan denominated in USD?
It's not only impossible for a government to not be able to pay back a loan in its currency - it has pretty much full control over the interest rate (it can be pushed down with QE at will). If the government wants to borrow at 0.1% it can - and the US government apparently does.
The only countries that have defaulted or come close to defaulting on their loans are countries that borrowed in a currency they didn't print (Zimbabwe->USD, Greece->Euro) or countries that unilaterally decided "fuck it, most of our debt is owned by foreigners, let's just not pay them" (Russia).
If you print too much money you might end up with hyperinflation and bad effects for your citizens. That's just as big "trouble" as a personal bankruptcy.
That's not a real risk for the US at the moment, but it's a backstop that answers the question of "why can't we solve all our economic problems by borrowing or printing more money?"
That's about the rate of spending exceeding the economy's ability to produce, not the overall level of debt. It can even happen in surplus.
Every country that has suffered hyperinflation had it come about because of a critical reliance upon imports and/or a debt denominated in a foreign currency. Zimbabwe didn't face hyperinflation because the deficit was a bit too high. It faced hyperinflation because they took on foreign debts which they tried to pay back and destroyed their farms.
>That's just as big "trouble" as a personal bankruptcy.
And a totally different economic problem.
>That's not a real risk for the US at the moment
And it likely never will be and still has nothing to do with aggregate debt to GDP.
Didn't France use to have a system where they just printed all money that government spent, and all money they received from taxation ceased to exist?
It's similar to debt-to-income ratio that creditors look at. A debt-to-income ratio of 100% is considered fine as long as it is low interest. Someone with a $100k mortgage on a $100k income is in great shape, they could actually afford a much larger mortgage.
The mistake is forgetting the units. Debt is in Dollars, GDP is Dollars/Year.
That makes Debt-to-GDP ratio have the units of Time, not percent.
https://www.forbes.com/sites/timworstall/2011/06/28/gdp-for-...
tl;dl - the closest approximation to GDP that you can pull from a public company's financial statements is gdp = profit + wages paid.
He goes out of his way to correct other journalists without himself offering the right answer.
Sounds like you want profit and not revenue then? Just like a trade deficit is subtracted from GDP, shouldn’t you subtract the costs from revenues of a company to arrive at a similar metric?
Annual change in National Wealth (an obscure metric, because it's so difficult to quantify) is a closer match to profit - after performing all your activities, how ahead do you get in terms of infrastructure, education, durable goods, etc.? Whereas GDP measures the amount of activity, in the same way as revenue or expenditure is a good way of estimating how much work is getting done at a company.
Even if you've utterly failed to understand the concepts of "market cap" and "gross domestic produce", there's simply nothing about those terms that suggests they might be comparable.
My favorite one is the electricity sector, especially when it comes to renewable energy: people compare the «amount of energy» produced by a solar plant (kWh), to the «amount of energy» consumed by a household (also in kWh). But this comparison is pointless (as long as we don't have ways to efficiently store electricity power) because there's no way you could supply a household with the electricity the solar plant produce: when the solar plant produces its «energy», the household doesn't consume much (if anything since most people aren't home at day) and when the household consumes electricity, the plant usually doesn't produce much because it's night or close to it. The only useful comparison unit when it comes to an electric grid is «power» not «energy» (as long as we have no storage), yet people uses energy as a comparison all the time …
It’s a very good, mostly accurate and approachable way to get people to understand how much electricity is generated by a specific method.
Your demand that the mechanism for communicating “scale of electricity generation to the lay person” also include a mechanism for communicating the intricacies and vagaries of the power distribution system is ludicrous.
Unless, of course, you have a better way to communicate this information to my mom, a non-technical 75 year old?
But people aren't that stupid, they can understand a lot of this complexity if you take 5 minutes to explain it to them (we're not talking about quantum physics here). I've been teaching how the grid works to people in jail, and I doubt your mom has less ability than the average French inmate.
Of course five minutes is more than the 3 seconds it takes to use the fallacious «energy» comparison, and I think the problem lies more in the laziness of the knowledgeable people than the lack of technical knowledge of the general population.
Number of outstanding shares * current market price.
If Apple sold 90% of their shares in a day, the price would be close to 0.
Think about how much sense it makes to say "200 miles? That's about as far as the top speed of a Nascar car!" There's kind of a valid comparison happening, but it requires the reader to correctly guess the time period you're talking about for the speed.
If you were to convert all shares to cash, you could make every single purchase that was made within that country in a year.
That tells you a lot about how much value you are dealing with.
It is similar to the physical volume of the market cap, if it was converter to cash.
Market price is based on the present level of supply and demand. Dumping all shares on the market would swamp demand with excess supply. The entire notion of market capitalisation has ... significant issues.
Put in a different context, many advocates of asteroid mining treat ore prices as fixed. The reality is that dumping an astronomical quantity (literally!) on the market would have drastic impacts (non-astronomically).
Pricing of extractive minerals has been recognised as problematic going back at least to Ricardo. See also: Spindletop, Dad Joiner, and the Harbord List.
Yep, it's hard to see with the big numbers involved, but if you reduce it to smaller numbers it's easier to see (though less accurate).
We have 10 shares of stock at $50, and we have 10 people in a population. 5 people own 2 shares each, 5 people own no shares. To see the entire value of the stock realized, the 5 people that have it would have to sell all their shares to the 5 that don't. Of course, in reality the 5 people that have it are generally a self selecting group, they tend to have the wealth and the stock, so in general there does not exist a market that can absorb the sale of all the stocks to new people, since people that have the stock are the ones that are most likely to buy more.
But then it is not the comparison that is problematic, but the number, that you are claiming doesn't represent anything.
You could also argue that we can't compare these numbers because GDP are not capturing all transactions.
https://scholar.google.com/scholar?q=problems%20with%20gdp&b...
But if that actually happened, the price would collapse.
Im back to the
"They are not comparable" camp.
By that logic, you are really just saying that the market cap is an invalid number, and as such cannot be compared to anything.
Or: a flow, accumulated during a period of time, could buy a stock. For example, "if Netherlands would invest all of it GDP generated during one year, it could buy Apple".
Debt (stock) to GDP (flow) ratio is very useful, because it allows to see the percentage of the yearly GDP that would be needed to pay 100% of the debt.
Of course, here on HN people got this right 4 days ago. :)
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