market capitalisation and GDP

manchanda.arpit4
Posts: 1
Joined: Fri Jul 28, 2017 1:30 pm

market capitalisation and GDP

Postby manchanda.arpit4 » Sun Sep 03, 2017 5:27 pm

Can we compare market capitalisation of a stock market with GDP of another country?

Say:
The market capitalisation of BSE is around $2 Trillion and GDP of around 170 countries is below this.
So can we compare that two?

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edupristine
Finance Junkie
Posts: 798
Joined: Wed Apr 09, 2014 6:28 am

Re: market capitalisation and GDP

Postby edupristine » Mon Sep 04, 2017 6:51 am

The Market Capitalisation of of stock market should not be compared to the GDP of another country because GDP represents the growth of a particular country which is itself dependent on several factors like net imports, government spending , consumption etc. It is not feasible to compare let say India's GDP with NASDAQ. The Stock market is dependent on the performance of the performance of the companies which are listed in that particular stock market of the company.

For Example: Cross Country Comparison
When we use the market-cap-GDP ratio to do cross-country comparisons, we come to strange conclusions. Let us look at an example. Say, the US GDP is approximately $17 trillion and the market cap is $22 trillion.

The ratio of the two works out to 1.29. At the other end, let us look at Saudi Arabia. Here the GDP is about $745 billion and the market cap is only $483 billion. So, the market cap-GDP ratio would be 0.64. Does this mean that Saudi Arabian stocks are undervalued and American stocks are overvalued?

Cross-country comparisons do not always make sense. The ratio would get skewed because each country would have a different proportion of listed versus unlisted enterprises.


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