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Comment by pavpanchekha | Hacker News Reader

GDP is value created per year. Market cap is (a proxy for) value created over the whole future existence of the corporation, at some discount rate. The obvious cap on market cap of a company is total world wealth, which is on the order of few hundred trillion.

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To be a bit pedantic, GDP is not "value created per year". GDP is a measure of economic activity. That's it.

GDP = private consumption + gov expenditures + total investments + net imports/exports. IOW, it's a measure of the $ value of things bought/sold. IOW, economic activity.

That said, over short time horizons, GDP can be used as a rough proxy for many other economic metrics. But only because the structure of an economy doesn't change drastically in just a few years. As you increase time horizons, the structure of an economy changes and GDP becomes a poorer proxy for other economic metrics. If this is so, why do so many people use GDP? Because it's easy to measure fairly accurately.

This statement seems to assume wealth is a fixed constant, which it isn’t. Theoretically if it was believed a company will create a thousand trillion in wealth it could be valued against that.

http://www.paulgraham.com/wealth.html

Thanks, yeah, I felt a little uneasy with the comparison. I figure this means market cap should be a bounded function of GDP, yeah?

You're basically asking how to convert assets (market cap) to income (GDP). But there isn't a fixed conversion: it depends on your discount rate (how valuable is future money compared to current money) which itself you can loosely think of as related to interest rates, which themselves change over time. Alternatively, think of the P/E ratio, which also changes over time. There's no bound. If you think humanity will exist forever, and you're willing to wait forever, and you think Apple will continue selling iPhones at a large profit forever, its value is effectively infinite.

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