
Business writers, please stop comparing market value to GDP - shubhamjain
https://www.cjr.org/business_of_news/business-writers-please-stop-comparing-market-value-to-gdp.php
======
RyanCavanaugh
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.

~~~
dalbasal
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...

~~~
j88439h84
What does piece of string mean?

~~~
RyanCavanaugh
People will ask a question like "How long does it take to plow a field?" and
get useless responses like "How long is a piece of string?", the implication
being that no satisfactory answer could be given because a specific answer is
dependent on factors not known in the question. This is done in lieu of
providing a useful order-of-magnitude answer.

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.

~~~
j88439h84
Thanks for clarifying this!

------
nsajko
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#Limitat...](https://en.wikipedia.org/wiki/Gross_domestic_product#Limitations_and_criticisms)

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/)

------
docdeek
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
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
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

------
87tau
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?

~~~
thanatropism
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
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.

~~~
thanatropism
Yes, but this is an artifact of discrete time.

In discrete time increments, your running velocity is an aggregate of how much
you walked over an hour. Or something.

------
oliwarner
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
>They're all made up numbers

All numbers are made up.

------
dmurray
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.

~~~
jorvi
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
It's not really all that different from borrowing to improve your personal
money flow. Borrow for a house to decrease the amount you spend on rent,
borrow for a car to commute to your job and earn more money, take a student
loan to get a higher paying job in the future. Of course, both governments and
individuals can make bad decisions or get unlucky, and the government has more
negotiating power if it has trouble repaying the loan. But on some level you
can be "stupid" not to borrow money if the return to your personal finances
outpaces the interest.

~~~
crdoconnor
>It's not really all that different from borrowing to improve your personal
money flow. Borrow for a house to decrease the amount you spend on rent,
borrow for a car to commute to your job and earn more money, take a student
loan to get a higher paying job in the future. Of course, both governments and
individuals can make bad decisions or get unlucky, and the government has more
negotiating power if it has trouble repaying the loan.

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).

~~~
dmurray
> How exactly would a government that prints USD have trouble repaying a loan
> denominated in USD?

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?"

~~~
crdoconnor
>If you print too much money you might end up with hyperinflation

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.

------
chr4004
It might just be semantics but of course you can compare those numbers - just
not in a very useful way. :-)

------
coldcode
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.

------
cjlars
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-...](https://www.forbes.com/sites/timworstall/2011/06/28/gdp-for-a-
country-is-not-the-same-thing-as-turnover-for-a-business/#5fa621c61206)

tl;dl - the closest approximation to GDP that you can pull from a public
company's financial statements is gdp = profit + wages paid.

~~~
tanderson92
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
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
You mean an answer _you_ agree with. He did try to provide a correct
comparison of the flows, contra to your initial post.

------
potlee
> 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
Revenue seems apt. Countries GDP also do not take costs and taxes into
account...or does it?

~~~
azernik
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.

------
ryanlol
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.

~~~
CJefferson
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
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
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.

------
wodenokoto
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
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.

~~~
wodenokoto
> 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.

~~~
dredmorbius
Well, that is a rather well discussed matter, going back to at least Simon
Kuznets.

[https://scholar.google.com/scholar?q=problems%20with%20gdp&b...](https://scholar.google.com/scholar?q=problems%20with%20gdp&btnG=Search&as_sdt=800000000001&as_sdtp=on)

------
crazygringo
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)

