<p>You are correct in suspecting that this firm produces no added value, but this does not contradict your definitions.</p>
<blockquote>
<p>We sum up the cost of salaries and retained earnings of all firms in the economy <br>
[...] <br>
[a firm] produces no products, and its only expense is the CEO's salary which is $1 million dollars per year.</p>
</blockquote>
<div class="s-table-container">
<table class="s-table">
<thead>
<tr>
<th style="text-align: center;">salaries</th>
<th style="text-align: center;">retained earnings</th>
<th style="text-align: center;">sum</th>
</tr>
</thead>
<tbody>
<tr>
<td style="text-align: center;"><span class="math-container">$+$</span> 1 million</td>
<td style="text-align: center;"><span class="math-container">$-$</span> 1 million</td>
<td style="text-align: center;">0 million</td>
</tr>
</tbody>
</table>
</div><hr />
<p>EDIT:
user161005 pointed out that I did not answer the question in the title. Unprofitable companies <em>can</em> increase GDP. In the above example, if, due to some amount of production, the retained earnings were only −0.5 million dollars, the company would still operate at a loss, but the net (direct) effect on GDP would be positive.</p>
<div class="s-table-container">
<table class="s-table">
<thead>
<tr>
<th style="text-align: center;">salaries</th>
<th style="text-align: center;">retained earnings</th>
<th style="text-align: center;">sum</th>
</tr>
</thead>
<tbody>
<tr>
<td style="text-align: center;"><span class="math-container">$+$</span> 1 million</td>
<td style="text-align: center;"><span class="math-container">$-$</span> 0.5 million</td>
<td style="text-align: center;">0.5 million</td>
</tr>
</tbody>
</table>
</div>
<p>GDP is a problematic measure in many ways. The second example only shows us that GDP is higher if the company exists and employs these people than if the company did not exist and these people were unemployed. This begs the question: Is the labor in this example really &quot;worth&quot; 1 million dollars? (Is this a market value?) If it is, then if the company were to close AND the labor would be reallocated via the job market to other companies earning a similar salary, we would get an increase in GDP.</p>

CC BY-SA 4.0
2021-07-08T09:45:35.967Z
So, the answer to the question in the title is "NO"
KarmaPeasant
CC BY-SA 4.0
2021-07-08T10:09:46.553Z
@user161005 That is not true. In the above example GDP would increase if the retained earnings were only $- 0.5$ million.
Giskard
CC BY-SA 4.0
2021-07-08T10:51:43.967Z
Why are retaining earning -0.5 million in the second example, instead of -1.5 million, considering that CEO is paid 1 million?
KarmaPeasant
CC BY-SA 4.0
2021-07-08T12:38:59.730Z
@user161005 I am afraid I don't understand your question.
Giskard
CC BY-SA 4.0
2021-07-08T12:42:38.960Z
The firm had expenses due to production, according to you. Like maybe in order to make a factory work the firm spent 0.5 million of dollars. But you forgot about the CEO, whom the firm also gave 1 million dollars. So 0.5 + 1 of expenses mean 1.5 of expenses
KarmaPeasant
CC BY-SA 4.0
2021-07-08T13:00:27.117Z
"*The firm had expenses due to production, according to you.*" Where do I write that the firm has any non salary expenses? Perhaps you misunderstood the sentence "*due to some amount of production, the retained earnings were only −0.5 million dollars*". This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. Or perhaps you are confusing retained earnings with some other category?
Giskard
CC BY-SA 4.0
2021-07-08T15:37:32.247Z
" Where do I write that the firm has any non salary expenses? ... This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. " Thanks, now I see how this is possible. Although I find GDP increase kind of counter-intuitive, as negative profits usually indicate wealth destruction. So we can have higher wealth destruction and higher GDP at the same time DUE TO said wealth destruction!
KarmaPeasant
CC BY-SA 4.0
2021-07-08T16:01:37.070Z
Thanks for this very interesting example! This demonstrates that when we consider the productive value of a company we should not consider its contribution to the GDP. Instead we should consider what the GDP would have been, had this company not existed.
Mark
CC BY-SA 4.0
2022-07-31T17:13:40.350Z
@user161005 There is no wealth destruction in any of the above examples. The negative profit in this case is due to the fact that the company is on the paying end of what is effectively a transfer payment.
Blavius
CC BY-SA 4.0
2021-07-08T04:14:56.583Z
2021-07-08T10:23:41.780Z
2021-07-08T10:23:41.780Z
Giskard
<p>One of the textbook ways to calculate GDP is through the factor payments. We sum up the cost of salaries and retained earnings of all firms in the economy (assuming no taxes or international trade).</p>
<p>Consider a firm that operates at a net loss. It produces no products, and its only expense is the CEO's salary which is $1 million dollars per year. It funds this salary expense by taking on debt and venture capital investments.</p>
<p>But this firm seemingly adds $1 million to the annual GDP via its employee salary factor payment even though it doesn't seem to produce anything.</p>

<gdp>
Can an unprofitable company increase GDP?
Mark
# Can an unprofitable company increase GDP?

(Asked by: username_0 on 2021-07-08)

One of the textbook ways to calculate GDP is through the factor payments. We sum up the cost of salaries and retained earnings of all firms in the economy (assuming no taxes or international trade).

Consider a firm that operates at a net loss. It produces no products, and its only expense is the CEO's salary which is $1 million dollars per year. It funds this salary expense by taking on debt and venture capital investments.

But this firm seemingly adds $1 million to the annual GDP via its employee salary factor payment even though it doesn't seem to produce anything.

**Tags:** gdp

---

## 1 answers

### Answer by username_1 on 2021-07-08. Score: 6 | Accepted answer

You are correct in suspecting that this firm produces no added value, but this does not contradict your definitions.

> We sum up the cost of salaries and retained earnings of all firms in the economy   
> [...]   
> [a firm] produces no products, and its only expense is the CEO's salary which is $1 million dollars per year.

| salaries | retained earnings | sum |
| --- | --- | --- |
| $+$ 1 million | $-$ 1 million | 0 million |

---

EDIT:
user161005 pointed out that I did not answer the question in the title. Unprofitable companies *can* increase GDP. In the above example, if, due to some amount of production, the retained earnings were only −0.5 million dollars, the company would still operate at a loss, but the net (direct) effect on GDP would be positive.

| salaries | retained earnings | sum |
| --- | --- | --- |
| $+$ 1 million | $-$ 0.5 million | 0.5 million |

GDP is a problematic measure in many ways. The second example only shows us that GDP is higher if the company exists and employs these people than if the company did not exist and these people were unemployed. This begs the question: Is the labor in this example really "worth" 1 million dollars? (Is this a market value?) If it is, then if the company were to close AND the labor would be reallocated via the job market to other companies earning a similar salary, we would get an increase in GDP.

> **Comments:**
> **username_2**: So, the answer to the question in the title is "NO"  
> **username_1**: @user161005 That is not true. In the above example GDP would increase if the retained earnings were only $- 0.5$ million.  
> **username_2**: Why are retaining earning -0.5 million in the second example, instead of -1.5 million, considering that CEO is paid 1 million?  
> **username_1**: @user161005 I am afraid I don't understand your question.  
> **username_2**: The firm had expenses due to production, according to you. Like maybe in order to make a factory work the firm spent 0.5 million of dollars. But you forgot about the CEO, whom the firm also gave 1 million dollars. So 0.5 + 1 of expenses mean 1.5 of expenses  
> **username_1**: "*The firm had expenses due to production, according to you.*" Where do I write that the firm has any non salary expenses? Perhaps you misunderstood the sentence "*due to some amount of production, the retained earnings were only −0.5 million dollars*". This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. Or perhaps you are confusing retained earnings with some other category?  
> **username_2**: " Where do I write that the firm has any non salary expenses? ... This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. " Thanks, now I see how this is possible. Although I find GDP increase kind of counter-intuitive, as negative profits usually indicate wealth destruction. So we can have higher wealth destruction and higher GDP at the same time DUE TO said wealth destruction!  
> **username_0**: Thanks for this very interesting example! This demonstrates that when we consider the productive value of a company we should not consider its contribution to the GDP. Instead we should consider what the GDP would have been, had this company not existed.  
> **username_3**: @user161005 There is no wealth destruction in any of the above examples. The negative profit in this case is due to the fact that the company is on the paying end of what is effectively a transfer payment.  

---

