<p>GDP is the sum of wages and capital income. In most developed economies, 2/3rds of GDP is wages (income and other compensation) and the remainder is capital income (owner occupied rents, interest and dividends mostly). This ratio is difficult to measure precisely but the general consensus is that it has been mostly but not perfectly stable over time.</p>
<p><a href="https://i.sstatic.net/fKFKu.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/fKFKu.png" alt="enter image description here" /></a></p>
<p><a href="http://economix.blogs.nytimes.com/2013/09/09/why-labors-share-of-income-is-falling/" rel="nofollow noreferrer">Why Labor’s Share of Income Is Falling By Jared Bernstein</a></p>
<p>Therefore, if the economy <span class="math-container">$Y$</span> grows at a rate <span class="math-container">$g$</span> and the capital income is roughly <span class="math-container">$Y/3$</span> then it too must be growing at rate <span class="math-container">$g$</span>. If discount rates <span class="math-container">$r$</span> are also constant this implies that wealth is <span class="math-container">$\frac{Y}{3(g-r)}$</span> which also grows at rate <span class="math-container">$g$</span>. Now it turns out that discounts rates are not constant and have been in long term decline, and as long as this is the case the value of the capital and land assets of the economy can indeed grow faster than output does. The following figure, which depicts financial assets relative to GDP, doesn't fully capture this issue (it omits non-financial assets like much of real estate) but it is a decent approximation.</p>
<p><a href="https://i.sstatic.net/gX2b6.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/gX2b6.jpg" alt="enter image description here" /></a></p>
<p>All of which implies that capital income like other quantities roughly proportional to output, must grow at the same speed as output. Assets can grow at a different rate in the short to medium term than output, but that only if there are long term changes in the discount rate. But most firms are very small and even the largest ones are small relative to the whole economy. Firms are being founded and failing all the time, so there is plenty of room for individual firm to grow faster or slower than the economy as a whole.</p>

CC BY-SA 3.0
2016-09-12T23:11:04.527Z
2016-09-15T09:54:41.623Z
2020-06-17T09:40:54.643Z
BKay
<p>I was listening to a famous investor discuss an investment of his in an interview. He had bought shares in a bank that was quite successful, though it was a small bank. The bank is based in a highly under-developed country with a massive population. This country's economy has a high rate of growth (about 8%).</p>

<p>The investor made an interesting comment. He said, </p>

<blockquote>
  <p>"of course, the bank is going to grow at 3x the growth rate of the
  country's GDP."</p>
</blockquote>

<p>He didn't offer any further reasoning for this. And it wasn't clear whether he meant the bank's <strong>revenues</strong> or its <strong>stock price</strong> are going to grow at 3x.</p>

<p>However, this led to me thinking about an interesting issue that I had never considered before.</p>

<p>There must be some kind of model which helps us predict whether a company's <strong>(1) revenue</strong> and <strong>(2) stock price</strong> will grow faster or slower than the overall economy. </p>

<p>What are some of the variables and considerations in this model, and in what direction do they act (e.g. do they grow or reduce <strong><em>(1)</em></strong> or <strong><em>(2)</em></strong>)?</p>

CC BY-SA 3.0
2016-09-13T07:48:28.603Z
If the economy is growing, more people may move from cash transactions towards banking.  Or this particular bank may increase its fraction of the market because it is well run.   So that allows some predictions/guesses as to the bank's future revenues.   But if investors are already aware of this then it may already be reflected in the  share price, and so the share price may change in a different way in future
Henry
<economic-growth><stock-market><investment>
When should a company's revenue and share price grow faster or slower than the economy?
thanks_in_advance
# When should a company's revenue and share price grow faster or slower than the economy?

(Asked by: username_0 on 2016-09-12)

I was listening to a famous investor discuss an investment of his in an interview. He had bought shares in a bank that was quite successful, though it was a small bank. The bank is based in a highly under-developed country with a massive population. This country's economy has a high rate of growth (about 8%).

The investor made an interesting comment. He said,

> "of course, the bank is going to grow at 3x the growth rate of the
> country's GDP."

He didn't offer any further reasoning for this. And it wasn't clear whether he meant the bank's **revenues** or its **stock price** are going to grow at 3x.

However, this led to me thinking about an interesting issue that I had never considered before.

There must be some kind of model which helps us predict whether a company's **(1) revenue** and **(2) stock price** will grow faster or slower than the overall economy.

What are some of the variables and considerations in this model, and in what direction do they act (e.g. do they grow or reduce ***(1)*** or ***(2)***)?

**Tags:** economic-growth, stock-market, investment
> **Comments:**
> **username_1**: If the economy is growing, more people may move from cash transactions towards banking.  Or this particular bank may increase its fraction of the market because it is well run.   So that allows some predictions/guesses as to the bank's future revenues.   But if investors are already aware of this then it may already be reflected in the  share price, and so the share price may change in a different way in future  

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## 1 answers

### Answer by username_2 on 2016-09-12. Score: 1

GDP is the sum of wages and capital income. In most developed economies, 2/3rds of GDP is wages (income and other compensation) and the remainder is capital income (owner occupied rents, interest and dividends mostly). This ratio is difficult to measure precisely but the general consensus is that it has been mostly but not perfectly stable over time.

[![enter image description here](https://i.sstatic.net/fKFKu.png)](https://i.sstatic.net/fKFKu.png)

[Why Labor’s Share of Income Is Falling By Jared Bernstein](http://economix.blogs.nytimes.com/2013/09/09/why-labors-share-of-income-is-falling/)

Therefore, if the economy $Y$ grows at a rate $g$ and the capital income is roughly $Y/3$ then it too must be growing at rate $g$. If discount rates $r$ are also constant this implies that wealth is $\frac{Y}{3(g-r)}$ which also grows at rate $g$. Now it turns out that discounts rates are not constant and have been in long term decline, and as long as this is the case the value of the capital and land assets of the economy can indeed grow faster than output does. The following figure, which depicts financial assets relative to GDP, doesn't fully capture this issue (it omits non-financial assets like much of real estate) but it is a decent approximation.

[![enter image description here](https://i.sstatic.net/gX2b6.jpg)](https://i.sstatic.net/gX2b6.jpg)

All of which implies that capital income like other quantities roughly proportional to output, must grow at the same speed as output. Assets can grow at a different rate in the short to medium term than output, but that only if there are long term changes in the discount rate. But most firms are very small and even the largest ones are small relative to the whole economy. Firms are being founded and failing all the time, so there is plenty of room for individual firm to grow faster or slower than the economy as a whole.


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