Thursday, 4 August 2016

Stocks vs. flows, example #515

Every now and again (and far too often for my liking), the media demonstrate their lack of basic economic literacy and come up with another example of my pet peeve - inappropriately comparing a stock (e.g. a firm's market capitalisation) with a flow (e.g. a country's GDP). The latest example comes from this opinion piece in the New Zealand Herald by Juha Saarinen:
Don't forget that Uber is valued at $82.3 billion currently.
In comparison, Statistics NZ pegs the local economy this year at around the $240b mark. Uber is bigger than our entire, $65b export sector.
Taking Uber's market capitalisation as $82.3 billion - that's the total value of all shares of Uber, and as good a measure as any of the total value of the firm. New Zealand's GDP is $240 billion according to Saarinen (actually more like $250 billion now, but let's not quibble). That's not a measure of the total value of the New Zealand economy. It's a measure of the total market value of goods and services produced by the economy in one year. It measures the value added by the New Zealand economy in one year. A better comparison is between New Zealand's GDP and Uber's net revenue (estimated at a not insubstantial US$1.5 billion for 2016). So, the New Zealand economy is about 120 times bigger than Uber (at current exchange rates). A similar comparison should be made with exports (which are measured in value-added terms). Uber is not bigger than the entire export sector - the New Zealand export sector is some 30 times bigger than Uber.

In essence, it isn't necessary to overstate the size of Uber by making inappropriate comparisons. We get the picture. Uber is a big firm. It just isn't as big as our entire economy (or even our entire export sector).

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