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September 12, 2004

The Observer Gets Its Economics Wrong, Again.

I wouldn't say I was surprised at a left leaning newspaper showing gross ignorance of economics but this is really too much to bear. Commenting on WalMart, Paul Harris informs us of the following:

Just a few facts and figures fill out the picture. Wal-Mart is the biggest company on earth. Its sales last year of $256 billion were more than the GDP of Poland. If it were a country, it would be ranked 19th in wealth in the world. With a staff of 1.5 million it has more men and women in uniform than the US army. Compared to that, Microsoft and News International are bit players in the game of capitalism.

The first point, that if we compare sales to GDP is correct. Why we should want to do that as the two figures mean completely different things is beyond me, unless we're just looking for some eye-catching figure to show, well, what, that capitalism is awful?
The second sentence, that it would be ranked 19th in the world if it were a country is total tosh, simply an example of pure economic illiteracy. The perpetrator should be set to do some homework to try to bring him up to speed. Perhaps something by Paul Krugman so that he can absorb it from a leftist economist, just so that he cannot reject the truth as coming from an ideologically unsound direction.
GDP and company turnover are not comparable in any way. Turnover is a measurement of everything a company does. GDP is a measure of the value added in an economy. If we wish to compare WalMart to a country we should compare the value added by WalMart to the GDP figure, trying to match apples with apples and not apples with oranges.
So, what is the measure of value added by WalMart? We might say that it is simply profits before depreciation (as GDP figures are before depreciation). From the annual accounts this is $8.8 billion or about $6,000 per person employed. Using the inestimable Nationmaster that would bring in WalMart somewhere below Bulgaria, or outside the top 100, using GDP per capita.
Well, that doesn't make much sense really, as we should be including wages paid to those 1.5 million employees. There's no simple number in the accounts that tell us that so I've used total operating expenses as a substitute. This includes all sorts of things like insurances and so on so is an overestimate. Those are given as $45 billion. Add profits and we get $ 54 billion of value added by WalMart. Yes, it's very rough and ready. However, it is a figure that is at least vaguely comparable to GDP figures. As such it would put WalMart somewhere around number 69 in the list of countries, somewhere around Guatemala or the Dominican Republic.
There is one further reason why this figure grossly over-estimates WalMart's (or any other company you care to mention) position, which is that GDP figures are counting the whole population, while a set of company figures only, by definition, include those who are economically active. No pensioners, babies, college students or unemployed are included, so value added per capita figures for a company are bound to be higher than GDP per capita.
Anyway, these rough figures do give us an insight into the position of WalMart, re say the Dominican Republic, a place with similar value added.
1.5 million mostly rich country workers (and therefore in high average productivity countries) add about the same value as a 9 million population of a poor country (and thus in a low productivity country). Wow, shock, horrors, American retail workers are 6 times more productive than peasant farmers! Hold the front pages!
That would be why people get on leaky boats and risk sharks and drowning to leave Hispaniola and go to work in WalMart then.
Sorry Mr Harris, back to school with you.

September 12, 2004 in Economics | Permalink


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Would $54 billion be an upper bound estimate?

Posted by: Joperd | Sep 23, 2004 2:37:14 AM


Posted by: psikeyhackr | Jun 26, 2005 4:48:13 PM


Posted by: Shivku | Apr 27, 2007 10:52:47 AM