Tuesday, April 29, 2008

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What did GDP ever do to deserve this?

One of the more invidious comparisons analysts like to make is to compare the size of something with a country's gross domestic product. An old warhorse of political economy/anti-corporate types, for example, is to say that the sales of multinational corporations exceeds many countries GDP. This is true but irrelevant -- GDP measures the value-added that an economy generates per year, so the proper and correct comparison is between a firm's profits and GDP. When using that metric, corporations suddenly don't look so big.

I bring this up because there have been a passel of press reports about this Global Indight study of sovereign wealth funds:

Sovereign Wealth Funds have grown a remarkable 24% annually, and now exceed some $3.5 trillion. If growth rates remain constant, they will surpass the entire current economic output of the United States by 2015, and Europe by 2016. Their importance already rivals that of hedge funds and private funds combined.
This statement is
a) Likely true;

b) Not a new fact -- these projections have been around for the past year or so;

c) An even more invidious comparison than the one comparing firm sales to GDP. In this case, Global Insight is comparing assets to revenue streams.

Sovereign wealth funds deserve some scrutiny, but this kind of headline-seeking comparison seems designed to do littledoesn't contribute much to the debate.

posted by Dan on 04.29.08 at 09:03 AM


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