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August 30, 2007

Grrr. Grrr.

This does bug me:

BP had total revenues of $266bn (£132bn) in 2006. If BP was a country, it would rank 27th in the World Bank's 2006 GDP league table, between Denmark and South Africa, above members of the European Union like Greece, Ireland and Portugal.


No, it bloody wouldn't. As said numerous times passim. Turnover of a company is not the same as GDP. GDP is value added so that appropriate comparison is with profits.* Thus BP (at $16 billion) is about number 80, Cyprus or El Salvador perhaps. Cyprus has some 800,000 people, by no means all of whom are economically active. BP has 100,000 employees, all of whom are indeed economically active, in an industry currently enjoying booming profits. I, for one, don't find it surprising that the employees of a multi-national oil company are three or five times more productive than the inhabitants of a poor Mediterranean island.

* For the proper pendants amongst us, this is not exactly true. There's some argument about what is the appropriate comparison: it's definitely not GDP to turnover, but it might be GDP to profits plus wages. No, too early in the day for me to try and do that one.

August 30, 2007 in Economics | Permalink

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Comments

I think comparing GDP and turnover is fair enough. Imagime a small country with a small population and massive oil resources, and all it does is extract it and export it (there are plenty of countries like this). The GDP of that country (net profits plus wages) is roughly equal to the country's turnover (export sales).

Posted by: Mark Wadsworth | Aug 30, 2007 9:49:42 AM

I think Mark's actually right here in the specific case of BP. If you had a small country with only one company in its economy and it was a resources company, then I'd be surprised if the GDP wasn't pretty similar to the top line of that company's accounts.

At the very least you'd need to add depreciation back in to profits btw, viz *Gross* domestic product.

Posted by: dsquared | Aug 30, 2007 11:04:56 AM

This comparison between companies and countries goes back at least to the 1960's, with books like "The sovereign state of ITT". At that time they compared, if memory serves me right, total assets of a company with the gold and currency reserves of a country. Realisable, immediately available assets. Except that of course a company's assets are not realisable without closing down the company and a country can't do without its gold reserves. Nobody pushing this argument considered the fact that a country has the right to realise far more assets than that, by taxing its inhabitants. And the political idea - that a company is therefore more powerful than a country - is ludicrous. A company needs goodwill to survive long; countries can last for decades without any. Ask Cubans or North Koreans whether they'd rather work for their state or a publicly-quoted company.

Posted by: Jim Winfield | Aug 30, 2007 11:06:52 AM

Kuwait would be the obvious comparison, it produces a bit more oil than BP, but a bit less gas, and it's GDP is 1/3rd of BP's turnover, but 5 times its profits.

I'm often the pedant who mentions the wage bill, but it really depends on why you are making the comparision. BP's staff, after all, spend most of their wages outside of BP's control. On the other hand BP clearly has a large influence in their lives.

Posted by: Matthew | Aug 30, 2007 12:38:20 PM

Hi Tim -

The proper comparison would be for gross value added, i.e. sales minus COGS (Cost of Goods and Services used in the production process, including a prorated amount for centralized services), but without the deduction of personnel costs (this would be net value added).

Put in financial terms, this is would be gross earnings EBITDA.

That is about as fair a comparison as you will be able to get: anything else is rhetoric/polemic...

Posted by: John F. Opie | Aug 30, 2007 1:47:28 PM

Is it pedantic to point out that I'm not a "pendant"?

Tim adds: No, not at all. Special word we have around here that is: Polly Toynbee once did a typo, calling me a pendant when she meant pedant. I like to use it occasionally as it gives me a warm glow at the memory.

Posted by: sjh | Aug 30, 2007 3:22:30 PM

"BP has 100,000 employees, all of whom are indeed economically active"

You forgot the HR department.

Posted by: DocBud | Aug 30, 2007 10:50:37 PM

You forgot the HR department.

Except the HR department is not economically active.

Tim did forget the subbies, which is where you'd go if you wanted to get something done in an oil company, or find something out.

Posted by: Tim Newman | Aug 31, 2007 3:33:08 PM

Indeed, a rule of thumb is to add profits to salaries paid to get something roughly equivalent to Gross Value Added (GVA).

You can't really use turnover - e.g. as it includes the value of goods that might be part manufactured or finished offshore and assembled in the UK - so doesn't count in terms of UK value added.

This is the kind of thing done by economists to estimate GDP in areas where you can't get detailed national accounts - e.g. at regional or subregional levels, or to estimate sectoral contributions to GDP where you can't get input-output tables.

GVA is an estimate of GDP based on net outputs.

Ah its all coming back to me now, national income accounting etc etc etc.

Plus - national income accounting and economic calculations of value added etc are much different to accounting rules - on treatment of assets, depreciation, current values, capital stock etc etc etc, yawn yawn yawn

Posted by: Glenn Athey | Aug 31, 2007 10:41:20 PM