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2012-03-14 09:20:08
By Ruth Alexander BBC News
"At $500 billion, Apple is worth more than Poland" - so shouted the headlines
last week. Can the technology giant really be worth more than this entire
country? No, and here's why.
CNN started this news line, which was picked up by media organisations around
the world.
It seems like an amazing fact - that Apple's stock market value, or market cap,
of $506bn ( 323bn) makes it worth more than Poland, whose Gross Domestic
Product is about $470bn ( 300bn).
This would make Apple around the 20th biggest economy in the world.
But it is not true. It makes no sense to compare the two like this. You might
as well compare apples and pears.
This is because the market value of a company is linked to the expected value
of all future profits. GDP, on the other hand, is a measure of the value of
goods and services a country has produced in a single year.
It is possible to compare the size of a company and a country, but it has to be
done properly, says Prof Paul De Grauwe, of the London School of Economics.
"We would have to make a forecast of future growth of GDP in Poland, and then
you would take the present value and use an interest rate," he says.
"My guess is that it would multiply the Polish number by a factor of at least
five."
This would give Poland a comparative value of almost $2.5 trillion ( 1.6tn),
putting it well ahead of Apple.
There is another respectable way to compare the two. For this, calculate
Apple's "added value" and compare that to Poland's GDP. (The Financial Times'
business glossary defines added value as "an increase in the value of something
that has been worked on, so that it can be sold in a new form".)
This makes sense because GDP is essentially a measure of a country's added
value - it is the value of all the goods and services there, minus anything
that has been imported.
"We would take the sales of Apple and subtract everything that is in the
iPhone, but that Apple has not produced itself," De Grauwe says.
"For example, some chips, or the screen, which has been produced in China
somewhere. And the difference then is what you could call the value added by
Apple. And that we compare with GDP which is the value added in Poland."
Start Quote
Just looking at the size doesn't tell us much about relative power of the
company v the country
Paul De Grauwe
Apple's relative value would shrink four or five-fold if you did the comparison
this way, De Grauwe estimates. This would make it the 56th largest economy in
the world, not the 20th. It would be 36 places behind Poland, just ahead of
Bangladesh and just behind Vietnam.
Even with these corrections, it is true that Apple is a big company.
But if a company is bigger than a country, does that mean it is more powerful?
Not necessarily, says De Grauwe.
"Just looking at the size doesn't tell us much about relative power of the
company v the country. Countries are still sovereign in the sense they can set
the rules of the game. They can tax companies, and they do."
And he points out that companies tend to have much more dramatic ups and downs
in their fortunes than countries. The market cap - properly called "market
capitalisation" - of a company is calculated by multiplying the current value
of a single one of its shares by the number of shares in existence.
"When you take the market cap of a company like Apple this can change very
quickly," says De Grauwe. "It is quite possible that in five years the market
cap of Apple could have dropped to $100bn or $200bn.
"Look what happened to Microsoft. Not so long ago Microsoft was the biggest
company in the world. Now it has weighed down. The price of a company's shares
can move up a lot, but can [also] crash."