No, not right. It's exactly what Dan Drezner said -- GDP measures the value-added that an economy generates per year. So if Ford spends $19,997 making a Taurus and you buy it for $20,000, you've added $3 to GDP.

But doesn't GDP include investments? GDP = C + I + G + (X-M), where I are gross capital investments.

Given this, net profit wouldn't be an accurate measure of a company's "GDP"--you've want to add in capital expenditures as well, wouldn't you?

Econ teacher here. The total sales of all firms add up to a number far greater than GDP, because of business-to-business transactions and other sales of "intermediate" goods and services. GDP only counts sales of new, domestically produced final goods and services, plus the earnings of government employees.

If you only look at profits, ExxonMobil's mere $40 billion last year is only bigger than the GDP of Lebanon. And Latvia, Cameroon, North Korea, and Bolivia.

And Luxembourg, Uruguay, El Salvador, Afghanistan, Cote d'Ivoire, Uganda, Ghana, Nepal, Bosnia, Estonia, Panama, Jordan, Paraguay, Montenegro, Cambodia, Equatorial Guinea, Honduras, Bahrain, Botswana, Trinidad and Tobago, Cyprus, Senegal, Gabon, Madagascar, Albania, Georgia, DR Congo, Nicaragua, Mozambique, Burkina Faso, Macedonia, Armenia, Papua New Guinea, Chad, Zambia, Haiti, Mauritius, Mali, Congo, Jamaica, Laos, Benin, Iceland, Tajikistan, Namibia, Malawi, Kyrgyzstan, Moldova, Guinea, Brunei, Malta, Niger, Rwanda, Mongolia, Bahamas, Burundi, Zimbabwe, Mauritania, Somalia, Barbados, Swaziland, Togo, Fiji, Sierra Leone, Eritrea, Guyana, Kosovo, Cape Verde, or Bhutan.

Or Suriname, Central African Republic, Lesotho, Maldives, Andorra, Belize, East Timor, Djibouti, Liechtenstein, Seychelles, Liberia, Gambia, Comoros, Samoa, Antigua & Barbuda, St. Lucia, Grenada, Monaco, St. Vincent & the Grenadines, Guinea-Bissau, Tonga, San Marino, Solomon Islands, Vanuatu. St. Kitts & Nevis, Dominica, Sao Tome and Principe, Micronesia, Kiribati, and Palau COMBINED.

If you look at Exxon's profits, not sales, that is.

Well, Neil isn't exactly right either, because if Ford spends $19,997 making a Taurus, all the workers and vendors they pay are adding to GDP as well. So your contribution to GDP from buying the Taurus is $3, but the making and selling of the car still contributes the full $20K. (And you might as well attribute that number to Ford as anyone else, albeit that means you can't generally add up all corporate revenues and compare them to GDP.)

In addition, the notion that GDP represents value added generated by a country's economy is pretty loony, because GDP only measures cash flow, not changes in the value of assets. GDP increases when you have a natural (or other) disaster because of all the rebuilding that gets done, even though a company would show a loss because of all the capital stock that was destroyed. On the other side of the ledger, something that reduces the flow of cash reduces GDP even when people throughout the country end up with a higher standard of living as a result.

So, for example, insofar as the Gutenberg Project reduces, even by a single penny, the purchases of books and magazines (or reduces spending by brick-and-mortar libraries) it is a drag on GDP.

So I'd say that yeah, direct comparison between coporate revenues and GDP is innacurate, but if you're talking about the size of the economic enterprise that a company or a country is responsible for, it's much better than comparing profits.

Yeah, this puzzled me too. If nothing else, profits would seem comparable to a net domestic product with deprecation of assets and such removed.

GDP can be broken down in several ways. The most familiar is the one cited by RWB above,

GDP = C + I + G + (X-M)

An alternative is payments to all factors of production. According to the Wikipedia article on GDP, this is:

GDP = Rents + Interest + Profits + SA + Wages

where SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)

So if you want to compare a firm to a country, add up its profit, wage bill, and interest and rent payments. This leaves out things like cost of materials. Notice that 2 firms with identical revenues may have entirely different values for this figure because of differences in how vertically integrated they are. The more vertically integrated one will (presumably) spend more on wages, so...

Dan is right. What nodakdude said.

Drezner's right--we'd want to focus on value added.

Drezner's wrong--value added is not synonomous with profit.

GDP from the private sector (about $12 trillion). Profit? About $2.62 trillion. (Fourth quarter 2007, according to the Burean of Economic Analysis.)

My gross income is considered a component of GDP, not my net income after paying living expenses.

I think I agree with his point that the amount the Ford actually contributes to the economy is only it's profits. The rest, tires for example, are made by another company, who bought the manufactured materials from another company, who bought the raw materials from another company, who had them shipped from another company. Each of those companies contributed a little to the economy.

Even the employees' labor is contributed by the workers to the economy... so that, I contribute my labor and in return I'm paid the value of that labor to the market.

Ford's profits are the return on its contributions to the economy.

The trouble is that someone "buys" a Ford for $20,000, it's usually using a loan of some sort. So they usually put down just a little, maybe $1000-2000, and the rest is payments spread out over a number of years. So only that $1000-2000 is actually real revenue, that is money put into the economy right away. But Ford will record that entire $20,000 as sales right away, because that looks better on the books. But it's phantom money. It ends up severely distorting the GDP figures. (It's actually even worse than that because of so many "nothing-down" promotions, in which people get cars without putting up any money at all. But Ford will post it as a real sale.)

Another good example is rebates. Ever wonder why so many companies offer "rebates" on the sales price, instead of simply directly lowering the price? It's because that way they can report the full sales figure (prior to the rebate) on their books, even though they don't actually get that much money. And the rebate gets deducted as a promotional expense.

But I'm not an economist. Am I correct on this?

Well, Neil isn't exactly right either, because if Ford spends $19,997 making a Taurus, all the workers and vendors they pay are adding to GDP as well.

Obviously, but Kevin and I were talking specifically about the transaction wherein Kevin buys a Taurus.

Corporate profits subtract out wages. You can compare GDP to profits (income for capital) plus wages (income for labor).

Marcel, above, has given you the proper frame of reference.

The other difficulty is that this comparison is usually made to discuss the raw power of a corporation, and there are no direct measures for this (also, it not clear whether the comparison is vs a country or a government). Probably some measure of revenue minus raw cost of materials (as per marcel's post), gives some idea of the amount of economic resource that a company can mobilise; I presume that for a mega-corporation (esp oil majors) this will still be a larger dollar amount than most Third-World governments spend, but it's not obvious how fundamentally that describes the relative power of the two, especially given how (comparatively) little coercive force a corporation is permitted to employ by host governments.

Short version - corporations and governments are just different institutions. Comparisons are hard.

Drezner is an idiot. And so is anyone who thinks a multinational's profits -- not its sales or revenue -- measures the full socioeconmic and geopolitical impact it has on the world, the environment, etc.

A company with a trillion dollars in sale, and a billion dollars in profits has a smaller impact than, say, Peru? What about a huge nonprofit? No profit, so no impact?

Nonsense. Apples and oranges.

I don't know if sales revenue is precisely comparable to GDP, but it's pretty close. Right?

GDP is only final goods and services, to get textbook-y about it. If Ford sells you an SUV for 20k then the total amount of GDP added is 20k. That's the point at which GDP accounting is done: when someone buys something to use it. The intermediate goods (tires) are counted as part of the vehicle. Ford's contribution to value-added is the 20k they sold the SUV for, minus the parts they had to buy to make it.

The point is, is that is someone makes a tire, the tire counts ONCE, at the end of the chain, when the tires are on the SUV they sold to you.

That's the theory. Profit doesn't fit into this equation, since profit is the amount of money left over from the sale (of all the products) after subtracting all the intermediate goods purchased AND all the expenses involved (worker pay, building maintainance, whatever). Or, another words, value-added is not equal to profit. Sorry.

Gross revenue is the total amount of final goods Ford is putting out, and that folds in all the intermediate goods from other suppliers and counts employees as part of Ford.

Since the GDP of a country is all the new final goods and services output by that country, there's no useful comparison to profit (unless you want to count net exports, or money stashed away by African dictators or something), but there's a fairly good comparison to revenue of a corporation. (Housing in a country counts every year, unlike stuff, so (possibly) comparing corporate revenue to GDP might be overstating the relative strength of a country.)

Drenzer said something stupid.

max
['And lame.']

Kevin, you are absolutely correct. GDP could be compared to the "top line" on a corporation's income statement, or it's gross revenues. GDP is the value of all goods and services, irrespective of the costs to produce those goods or services. A corporation's profits are what is "below" the line. In accounting terms, profit is revenue minus cost of goods sold minus selling and general adminstrative expenses minus taxes minus interest, etc.

It is totally and completely wrong to compare GDP to a corporation's profits. Mr. Drezner simply does not know what he is talking about. It is much more meaningful to compare a corporation's gross revenues to GDP. I am a licensed CPA and also have an MBA in Finance and I would be happy to give him a lesson in financial accounting.

Max's comment pretty much sums it up. GDP is basically everything sold in the US (minus net imports), leaving out intermediate goods so as not to double count.

So he's *right* that you don't want to include intermediate goods (cost of goods sold in business accounting).

But he's wrong that *profits* are even roughly analogous to measures of GDP.

Profits do not include things like overhead and labor costs.

If you are using the *expenditure* method of GDP calculation, you include the full $20,000 for the car - the cost of the intermediate goods is not subtracted (nor counted when sold to the car manufacturer), labor costs are not subtracted from the 20,000, rent on the building nor interest expenses are not subtracted from that 20,000. The full 20,00 counts.

If you are using the *income* method of GDP calculation, you don't count up total goods sold, instead you count up the total amount of payments to:
(1) labor (wages)
(2) owners (profits)
(3) lenders (interest)
(4) landlords (rents)

These are presumably the slices of the pie that all add up to the total final goods sold. The $20,000 isn't counted initially, but the payments to the relevant parties that contribute to its sale should add to 20k.

Drezner's a writer for Foreign Affairs, and a fully paid up member of the "Very Serious Foreign Policy Experts" crowd (a.k.a., those who, after much chin-scratching and very serious, deep, clear-eyed thought, pick the policy or candidate that will bomb Arabs. Regrettably, I'm sure).

I'm sure he's a nice guy, and he's surely way better than Thomas Friedman. But I wonder why the job description of "contrarian" liberal, one who points out the unseriousness of lefties on trade, foreign policy, etc., seems to be such an easy road to media exposure but no analogous position of Republican contrarian seems to exist?

The national account consist of two accounts. One counts what is produced. That is GDP. The second counts who gets the income from that output. That is national income. Profits, along with labor income, rents and interest are income as flubber explained above.

Technically national income will equal gdp, but there are small usually insignificant errors that cause the to to differ slightly.

Roughly, from 1950 to 2000 profits ranged from a low of some 3% to a high of 7% of gdp. This cycle it jumped to some 10.5% of gdp-- or about double the historic norm. That is one reason inequality has risen so sharply this cycle.

So the very small number you quoted for ford profits is the right order of magnitude for corporate profits in general.

There is very little validity to the point of view Drezner expressed.

But the real issue is control of resources. Ford will control the resources needed to generate its sales, including the labor it hires from its employees. Consequently, Ford's control or influence is more accurately measured by what it produces, the sales number reflects Ford's influence and what makes it more important to the world economy then many countries. Ford has influence in Washington not because it makes so many dollars in profits. Rather, Ford has influence in Washington because it controls so many jobs.

So in term of influence Drezner is throwing up a red herring.

It's pretty easy to show why Drezner is a complete idiot or had a severe brain fart or is a propagandist.

If a corporation the size of Microsoft, or Boeing, or US Steel at its height, or GM or Chrysler makes a loss, you wouldn't argue that the size of its "economy" was negative. They would still have a massive "GDP".

Several upstream have explained very clearly how to measure GDP. Now NDP makes more sense as it includes capital depreciation too.

Sales? No! Profits? Hardly. Maybe gross profits in the special case of trading companies:

angrybear.blogspot.com/2008/04/multinational-sales-v-gdp-drum-v.html

Oh, and there's a certain irony that his rather weak post is about comparing apples to oranges.

This would be much easier for non-economists to understand if the USA had a value-added tax instead of sales taxes. If I deal in gold bullion, my value-added is a tiny fraction of my sales; if I'm an Amish grower of organic vegetables, almost all my sales are value-added.

Absent actual information from a company, a very coarse rule of thumb would be to apply an average multiplier. The share of corporate profits in GDP is around 10%. I can't find a number for the share of corporations in GDP, as opposed to the public sector, non-profits and the self-employed, but let's say it's about half. That gives a profits-to-value-added multiplier of 5, which will do for an order-of-magnitude impression.

But why shouldn't corporations be required to publish their gross value added in their accounts? It's not as if they don't have the information to hand.