And other assorted economic illiterates:
Now Martin knows as well as any economist that dividing a stock (wealth) by a flow (GDP) is a no-no, and immediately classifies you as economically illiterate, along with those others who divide, say, stock-market valuations of multinational enterprises with country GDPs to say things like "these companies are bigger than whole economies…"
Just Say No!
4 responses so far ↓
1 Mark Wadsworth // Nov 7, 2007 at 7:45 pm
Dividing a flow by a stock gives a return on capital figure.
Dividing a stock by a flow gives an earnings multiple.
But comparing a stock market cap with GDP is of course nonsense.
2 Matthew // Nov 8, 2007 at 12:19 am
Yes, I’m not entirely sure why you think dividing a stock by a flow is a no-no. Do you not have a mortgage?
Tim adds: Sure I do. In fact, I made very much the same point yesterday over that whining report about student debt. “Many graduates have debt higher than their annual incomes” So what said I, one is a stok, payable over many years, the other is a flow, so it’s just like a mortgage.
3 Matthew // Nov 8, 2007 at 12:20 am
And actually, having read the article, it’s a bit silly. Martin Wolf is comparing two people on the same basis. Only if there is a difference between wealth and income in the two countries does it matter, and it seems a fair assumption to assume there’s not.
4 james c // Nov 8, 2007 at 1:06 pm
The author is talking rubbish.
It is perfectly sensible to calculate a country’s stockmarket capitalization or bank debt as a proportion of its GDP.
The ratio can then be compared with that in other countries or its historical range.
Scientists do not restrict themselves to dimensionless ratios, and nor should economists.
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