20 ms·

Business writers, please stop comparing market value to GDP

130 points by shubhamjain 8y ago

ryanlol 8y ago
This is mind-boggling. How do people who've presumably graduated high school make these mistakes? 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.
- littlestymaar 8y ago
  You know, people make bad comparisons all the time. 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 …
  - Ensorceled 8y ago
    That’s a bad example of a bad comparison. 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?
    - littlestymaar 8y ago
      The thing is: the problem is complex, and hiding this complexity behind a misleading comparison doesn't help. It makes people think they understand, and now they have an opinion on the subject. Too bad if this opinion is based on a completely flawed understanding due to a poor comparison. 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.
- CJefferson 8y ago
  Why aren't they comparable? They are two amounts of money. I can compare my mortgage payment to the cost of Apples, or how much my monthly phone bill is in oranges.
  - mkirklions 8y ago
    Because market cap is Number of outstanding shares * current market price. If Apple sold 90% of their shares in a day, the price would be close to 0.
    - che_shirecat 8y ago
      minor nitpick, but Apple (the publicly traded corporation) by definition does not own any shares outstanding and therefore would have none to sell. But yes, if 90% of Apple shareholders sold in a single day, something would be terribly wrong.
  - thedufer 8y ago
    No, they have different units. GDP is measured in currency/time (the denominator is usually a year) whereas market cap is measured in currency. 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.
chr4004 8y ago
It might just be semantics but of course you can compare those numbers - just not in a very useful way. :-)
docdeek 8y ago
The comparison is wrong but I think it has utility in putting that trillion dollar amount into context. Most people can understand a thousand dollars (context: not life changing money but a welcome surprise), a million dollars (imagine the house I could buy…), a billion dollars (the government wastes that in X minutes!) but a trillion dollars? That’s not normally part of our conversation. The comparison should be “Apple has a market cap of a trillion dollars. How big is that? Well it’s the same as X, Y, and Z…"
- danmaz74 8y ago
  I actually agree with you. The comparison is not correct, but useful. It reminds me of Box's comment that "all models are wrong, but some are useful". This comparison can (and is/will be) abused, but it's still useful for most laypeople.
  - pandem 8y ago
    I think the opposite. It is correct as a trillion dollars is a trillion dollars, but not useful as it is misleading. It is easy to assumr from these headlines that Apple would be similar in size to country x GDP
  - thanatropism 8y ago
    But it's not. 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".
- sametmax 8y ago
  That's the difference between accurate and useful. Technical oriented persons love to be correct, hence the famous joke : https://i.kym-cdn.com/photos/images/newsfeed/000/909/991/48c.jpg 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.
dmurray 8y ago
The one I dislike is the debt-to-GDP ratio. A year or two there was a lot of talk about the US being dangerously close to having debt at 100% of its GDP. That sounds scary, if you don't or can't think about it too hard - like the US literally can't have the money to pay its debts, and it's only a matter of time before its creditors realize that and make it sell Alaska. 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.
- IshKebab 8y ago
  That comparison is fine. Divide $ by $/day and what do you get? Days. The number of days of production that the US is in debt. That's a perfectly reasonable thing to measure.
  - dmurray 8y ago
    Right, it's good to measure it, and express it as "355 days". Not so good to run breathless articles about how it's "almost at 100%".
  - dredmorbius 8y ago
    This presumes quantity of currency is nonfungible
- jorvi 8y ago
  I think one of the bigger problems is people conflate government debt with personal debt. If you loan money to build a house, you eat the interest costs. But if the government loans money to build a bridge, that money flows into the economy creating jobs. As long as the growth that loaned money creates outpaces interest, the government would he stupid not to loan. Not to mention the absolute safest governments to 'stash' your money (The Netherlands and Germany come to mind) actually pay negative interest rates on some of their bonds.
  - dmurray 8y ago
wodenokoto 8y ago
I think they are perfectly comparable. 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.
- dredmorbius 8y ago
  Actually ... no. 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.
  - pixl97 8y ago
    > Dumping all shares on the market would swamp demand with excess supply. 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.
  - wodenokoto 8y ago
    > Dumping all shares on the market would swamp demand with excess supply. 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.
coldcode 8y ago
Charts doing stuff like this drives me nuts. Where I work VPs love to brag about how much better things are with them in charge. They then make a chart with 6 things in it all in different units on a single bar chart. Plus it compares the values at two points in time saying "see how much better I am doing before and after" yet the values ignore the points in between. So the "crash rate" goes from 0.4% to 0.3%, even though in between the crash rate was 5% for several versions. Then you add in other items which are dollars or counts or hours and you wonder what the point of the vertical axis is. So market value to GDP in a chart is so stupid.
potlee 8y ago
> The apt comparison would be between Apple’s revenue and Indonesia’s GDP, because GDP is not a measure of wealth, it’s a measure of output: the total value of goods and services produced by the country in a year. 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?
- 627467 8y ago
  Revenue seems apt. Countries GDP also do not take costs and taxes into account...or does it?
  - azernik 8y ago
    It's more that it doesn't take depreciation and destruction into account - the broken windows fallacy. 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.
nsajko 8y ago
The GDP itself is overused in an attempt to oversimplify complex systems. Simon Kuznets, who originally formulated GDP in 1937, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements": 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#Limitations_and_criticisms 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/ https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/
87tau 8y ago
So, it looks like GDP would be comparable to total market value of products and services provided the company in a year. That would be equal to revenue ignoring any free products/services the company provides (or do we also need to take into account sale of pre-owned products by third parties? ) I guess. Out of curiosity, is there a number then that is equivalent to market value of a company but applicable to a country?
- mc32 8y ago
  You could add up all the market caps of all of a country’s businesses, but thst only captures publicly traded companies... So, not sure it can be done directly, but indirectly by extrapolating onto private cos and enterprises, but that still would not capture grey market activities, etc.
- thanatropism 8y ago
  Level 0: GDP is a flow, market value is a stock. Market value is a distance reached, GDP is a velocity. 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.
  - 87tau 8y ago
    Thanks for the reply. I'm not an expert in economics and also not sure how much wikipedia is to be trusted, but going by definition: "IMF publication states that "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time (say a quarter or a year)", GDP is an aggregate over a time period, more like distance and not similar to velocity. GNP though is interesting, I hadn't heard of it before, I will explore it further.
crazygringo 8y ago
Thank you, yes a million times! Of course, here on HN people got this right 4 days ago. :) Previous discussion: https://news.ycombinator.com/item?id=17672799 https://news.ycombinator.com/item?id=17672799
RyanCavanaugh 8y ago
This is nonsense. Stock vs flow comparisons occur all the time and no one is confused. How often have you heard things like "Don't buy a house costing more than 3x your salary" ? No one objects and says it's illogical to compare a fixed cost to a rate of accumulation. 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.
- nabla9 8y ago
  You are correct, mostly. Stock value comparison to something else than just the nominal valuation is better than writing articles about the $1 trillion dollar valuation that was not first in any meaningful sense. Where you go wrong is saying that no one is confused. Articles writer themselves are often confused or write in confusing way.
- javaun 8y ago
  The "3x your salary" is a correct ratio of stock to flow: https://en.wikipedia.org/wiki/Stock_and_flow#Comparing_stocks_and_flows https://en.wikipedia.org/wiki/Stock_and_flow#Comparing_stock... The direct comparison of Apple market cap (stock) to country GDP (flow) is invalid. (EDIT: noting GDP is a flow measure)
- dalbasal 8y ago
  Maybe I'm being ungenerous, but I think this is purely a know-it-all response to articles, kind of a troll-lite. It's like commenting on sample sizes, for articles reporting on some preliminary study. 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...
oliwarner 8y ago
HN is a weird place. People are queuing up to beat on GDP but everybody seems happy that market cap actually means something worth comparing. 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.
- bvc35 8y ago
  >They're all made up numbers All numbers are made up.
cjlars 8y ago
Strangely the author complains about bad comparisons but spends little time on how to make a good comparison. Here's a take on how to properly compare a company's financial flows to a country's (GDP): https://www.forbes.com/sites/timworstall/2011/06/28/gdp-for-a-country-is-not-the-same-thing-as-turnover-for-a-business/#5fa621c61206 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.
- tanderson92 8y ago
  The author discusses the use of revenue as a proper company financial flow to use for comparison, provides an example of an article getting it right, and spends a significant amount of the article explaining the difference.
  - cjlars 8y ago
    Ya revenue's the wrong measure though. GDP is a measure of value added, but revenue includes all sorts of passthroughs including, for example, components imported from overseas (which are part of the GDP of their origin country and origin companies) . He goes out of his way to correct other journalists without himself offering the right answer.
    - tanderson92 8y ago
      You mean an answer you agree with. He did try to provide a correct comparison of the flows, contra to your initial post.

130 points by shubhamjain 8y ago

This is mind-boggling. How do people who've presumably graduated high school make these mistakes? 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.

littlestymaar 8y ago
You know, people make bad comparisons all the time. 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 …
- Ensorceled 8y ago
  That’s a bad example of a bad comparison. 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?
  - littlestymaar 8y ago
    The thing is: the problem is complex, and hiding this complexity behind a misleading comparison doesn't help. It makes people think they understand, and now they have an opinion on the subject. Too bad if this opinion is based on a completely flawed understanding due to a poor comparison. 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.
CJefferson 8y ago
Why aren't they comparable? They are two amounts of money. I can compare my mortgage payment to the cost of Apples, or how much my monthly phone bill is in oranges.
- mkirklions 8y ago
  Because market cap is Number of outstanding shares * current market price. If Apple sold 90% of their shares in a day, the price would be close to 0.
  - che_shirecat 8y ago
    minor nitpick, but Apple (the publicly traded corporation) by definition does not own any shares outstanding and therefore would have none to sell. But yes, if 90% of Apple shareholders sold in a single day, something would be terribly wrong.
- thedufer 8y ago
  No, they have different units. GDP is measured in currency/time (the denominator is usually a year) whereas market cap is measured in currency. 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.

chr4004 8y ago

It might just be semantics but of course you can compare those numbers - just not in a very useful way. :-)

docdeek 8y ago

The comparison is wrong but I think it has utility in putting that trillion dollar amount into context. Most people can understand a thousand dollars (context: not life changing money but a welcome surprise), a million dollars (imagine the house I could buy…), a billion dollars (the government wastes that in X minutes!) but a trillion dollars? That’s not normally part of our conversation. The comparison should be “Apple has a market cap of a trillion dollars. How big is that? Well it’s the same as X, Y, and Z…"

danmaz74 8y ago
I actually agree with you. The comparison is not correct, but useful. It reminds me of Box's comment that "all models are wrong, but some are useful". This comparison can (and is/will be) abused, but it's still useful for most laypeople.
- pandem 8y ago
  I think the opposite. It is correct as a trillion dollars is a trillion dollars, but not useful as it is misleading. It is easy to assumr from these headlines that Apple would be similar in size to country x GDP
- thanatropism 8y ago
  But it's not. 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".
sametmax 8y ago
That's the difference between accurate and useful. Technical oriented persons love to be correct, hence the famous joke : https://i.kym-cdn.com/photos/images/newsfeed/000/909/991/48c.jpg 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.

dmurray 8y ago

The one I dislike is the debt-to-GDP ratio. A year or two there was a lot of talk about the US being dangerously close to having debt at 100% of its GDP. That sounds scary, if you don't or can't think about it too hard - like the US literally can't have the money to pay its debts, and it's only a matter of time before its creditors realize that and make it sell Alaska. 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.

IshKebab 8y ago
That comparison is fine. Divide $ by $/day and what do you get? Days. The number of days of production that the US is in debt. That's a perfectly reasonable thing to measure.
- dmurray 8y ago
  Right, it's good to measure it, and express it as "355 days". Not so good to run breathless articles about how it's "almost at 100%".
- dredmorbius 8y ago
  This presumes quantity of currency is nonfungible
jorvi 8y ago
I think one of the bigger problems is people conflate government debt with personal debt. If you loan money to build a house, you eat the interest costs. But if the government loans money to build a bridge, that money flows into the economy creating jobs. As long as the growth that loaned money creates outpaces interest, the government would he stupid not to loan. Not to mention the absolute safest governments to 'stash' your money (The Netherlands and Germany come to mind) actually pay negative interest rates on some of their bonds.
- dmurray 8y ago

wodenokoto 8y ago

I think they are perfectly comparable. 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.

dredmorbius 8y ago
Actually ... no. 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.
- pixl97 8y ago
  > Dumping all shares on the market would swamp demand with excess supply. 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.
- wodenokoto 8y ago
  > Dumping all shares on the market would swamp demand with excess supply. 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.

coldcode 8y ago

Charts doing stuff like this drives me nuts. Where I work VPs love to brag about how much better things are with them in charge. They then make a chart with 6 things in it all in different units on a single bar chart. Plus it compares the values at two points in time saying "see how much better I am doing before and after" yet the values ignore the points in between. So the "crash rate" goes from 0.4% to 0.3%, even though in between the crash rate was 5% for several versions. Then you add in other items which are dollars or counts or hours and you wonder what the point of the vertical axis is. So market value to GDP in a chart is so stupid.

potlee 8y ago

> The apt comparison would be between Apple’s revenue and Indonesia’s GDP, because GDP is not a measure of wealth, it’s a measure of output: the total value of goods and services produced by the country in a year. 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?

627467 8y ago
Revenue seems apt. Countries GDP also do not take costs and taxes into account...or does it?
- azernik 8y ago
  It's more that it doesn't take depreciation and destruction into account - the broken windows fallacy. 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.

nsajko 8y ago

The GDP itself is overused in an attempt to oversimplify complex systems. Simon Kuznets, who originally formulated GDP in 1937, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements": 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#Limitations_and_criticisms 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/ https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/

87tau 8y ago

So, it looks like GDP would be comparable to total market value of products and services provided the company in a year. That would be equal to revenue ignoring any free products/services the company provides (or do we also need to take into account sale of pre-owned products by third parties? ) I guess. Out of curiosity, is there a number then that is equivalent to market value of a company but applicable to a country?

mc32 8y ago
You could add up all the market caps of all of a country’s businesses, but thst only captures publicly traded companies... So, not sure it can be done directly, but indirectly by extrapolating onto private cos and enterprises, but that still would not capture grey market activities, etc.
thanatropism 8y ago
Level 0: GDP is a flow, market value is a stock. Market value is a distance reached, GDP is a velocity. 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.
- 87tau 8y ago
  Thanks for the reply. I'm not an expert in economics and also not sure how much wikipedia is to be trusted, but going by definition: "IMF publication states that "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time (say a quarter or a year)", GDP is an aggregate over a time period, more like distance and not similar to velocity. GNP though is interesting, I hadn't heard of it before, I will explore it further.

crazygringo 8y ago

Thank you, yes a million times! Of course, here on HN people got this right 4 days ago. :) Previous discussion: https://news.ycombinator.com/item?id=17672799 https://news.ycombinator.com/item?id=17672799

RyanCavanaugh 8y ago

This is nonsense. Stock vs flow comparisons occur all the time and no one is confused. How often have you heard things like "Don't buy a house costing more than 3x your salary" ? No one objects and says it's illogical to compare a fixed cost to a rate of accumulation. 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.

nabla9 8y ago
You are correct, mostly. Stock value comparison to something else than just the nominal valuation is better than writing articles about the $1 trillion dollar valuation that was not first in any meaningful sense. Where you go wrong is saying that no one is confused. Articles writer themselves are often confused or write in confusing way.
javaun 8y ago
The "3x your salary" is a correct ratio of stock to flow: https://en.wikipedia.org/wiki/Stock_and_flow#Comparing_stocks_and_flows https://en.wikipedia.org/wiki/Stock_and_flow#Comparing_stock... The direct comparison of Apple market cap (stock) to country GDP (flow) is invalid. (EDIT: noting GDP is a flow measure)
dalbasal 8y ago
Maybe I'm being ungenerous, but I think this is purely a know-it-all response to articles, kind of a troll-lite. It's like commenting on sample sizes, for articles reporting on some preliminary study. 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...

oliwarner 8y ago

HN is a weird place. People are queuing up to beat on GDP but everybody seems happy that market cap actually means something worth comparing. 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.

bvc35 8y ago
>They're all made up numbers All numbers are made up.

cjlars 8y ago

Strangely the author complains about bad comparisons but spends little time on how to make a good comparison. Here's a take on how to properly compare a company's financial flows to a country's (GDP): https://www.forbes.com/sites/timworstall/2011/06/28/gdp-for-a-country-is-not-the-same-thing-as-turnover-for-a-business/#5fa621c61206 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.

tanderson92 8y ago
The author discusses the use of revenue as a proper company financial flow to use for comparison, provides an example of an article getting it right, and spends a significant amount of the article explaining the difference.
- cjlars 8y ago
  Ya revenue's the wrong measure though. GDP is a measure of value added, but revenue includes all sorts of passthroughs including, for example, components imported from overseas (which are part of the GDP of their origin country and origin companies) . He goes out of his way to correct other journalists without himself offering the right answer.
  - tanderson92 8y ago
    You mean an answer you agree with. He did try to provide a correct comparison of the flows, contra to your initial post.