In this blog post, we’ll explore why the total revenue of Korean companies appears to be higher than the country’s GDP and examine the statistical illusion behind this phenomenon.
Can GDP and Revenue Really Be Compared?
“The revenue of Korea’s top 500 companies accounted for 118.1% of the country’s GDP.” “The revenue of the Samsung, Hyundai Motor, LG, and SK groups exceeds half of the total GDP.” Articles like these occasionally appear in newspapers. While the subjects may vary, the format and content are similar. These articles point out that the share of specific companies or industries in the national economy is so large that it has become a problem. Whenever people come across articles with such headlines, questions briefly pop into their minds and then fade away: “If the top 500 companies earn more than 100% of GDP, what are the rest of the companies doing? Are they running at a loss and eating into GDP?” or “There are many other large companies besides the Big Four—what are they all doing?”
It’s natural to have these questions. The articles mentioned above can cause confusion because they place two concepts that are not appropriate to compare on the same level. For example, suppose we’re trying to determine which of two people, A and B, who have similar economic standing, is better off financially. Let’s say we compare A, whose annual salary is 50 million won, with B, whose total assets—including real estate, bank deposits, and stock investments—amount to 500 million won. Doing so naturally leads to the erroneous conclusion that Person B is 10 times better off than Person A. To avoid distorted conclusions, comparisons must be made using the same criteria. We will explore in more detail later why simply comparing a company’s revenue—the money earned from selling goods and services—with GDP leads to statistical illusions.
Let’s Start by Understanding GDP Correctly!
In this chapter, we will discuss Gross Domestic Product (GDP), which serves as the dashboard of our economy. The GDP growth rate is a figure that instantly reveals whether the economy is performing well or has lost momentum and fallen into a recession. First, let’s examine the precise definition of GDP and how the statistics are compiled. The U.S. Department of Commerce has cited GDP as the greatest invention of the 20th century. What role do GDP statistics actually play that politicians, economic officials, business leaders, and financiers around the world can’t take their eyes off this number?
“How well-off am I compared to the people around me?” “Am I better off now than I was five or ten years ago?” What kind of data is needed to answer these questions? First, we need data that allows for an objective comparison of our own financial status with that of those around us. We also need data to compare our past selves with our present selves. In this case, bank account balances or annual salaries can be used. To gauge how much our economic situation has improved, we can calculate our salary growth rate.
The same applies to nations. To determine how well we are living now compared to other countries or our past selves, we need objective statistics. These statistics are called economic indicators, and the most representative of these is GDP. To answer questions such as “How well-off is South Korea compared to the rest of the world?” and “How much better off are Koreans now compared to five or ten years ago?”, GDP statistics are essential. In other words, GDP is an indicator that clearly demonstrates a country’s economic performance.
So, what exactly does Gross Domestic Product (GDP), which we commonly refer to as GDP, mean? First, the term “GDP” is an abbreviation for “Gross Domestic Product.” The definition of GDP in economics can be explained simply as follows.
GDP is the sum of the market prices of the value added from goods and services produced by all economic entities—including households, businesses, and the government—within a country’s borders during a specific period. It is also accurate to describe this as the sum of the market prices of final goods and services, rather than the sum of value added.
Although I’ve explained it in detail, this definition may still seem complicated. Let’s break it down step by step to make it easier to understand. First, the phrase “over a specific period” in the context of GDP almost always refers to one year. Unless otherwise specified, GDP is calculated using one year as the standard unit. Second, GDP covers all production activities carried out within a country’s territory. When calculating GDP, it does not matter whether the people or companies involved in the production activities are from Korea or another country. The location where the production activities take place is the criterion that determines whether they are included in GDP.
For example, services and products produced by foreign companies operating in Korea are included in Korea’s GDP, while products and services produced by Korean companies at overseas factories are included in the GDP of the country where production took place. For example, the annual salary of soccer player Son Heung-min, who plays for Tottenham Hotspur FC in the English Premier League, is not included in South Korea’s GDP but is counted toward the UK’s GDP. Conversely, the annual salary of pitcher Dustin Nippert, who plays for the KT Wiz in the Korean Professional Baseball League, is counted toward South Korea’s GDP rather than that of his home country, the United States.
Finally, the condition that GDP is the sum of value added calculated at market prices can be confusing. The part that confuses many people the most is the statement that GDP is “the sum of the value added of goods and services produced through economic activity, calculated at market prices.” If you do not know the meaning of value added or do not properly understand this condition, you cannot understand what GDP is. Let’s assume there is a croquette shop owner, Mr. A, who makes and sells croquettes. He sells one croquette for 100 won. To make one croquette, he incurs a total of 60 won in raw material and fuel costs, consisting of 20 won worth of flour, 10 won worth of potatoes, 20 won worth of sausage, and 10 won worth of gas.
So, how much value added does Mr. A generate every time he makes a croquette? And by how much does the country’s GDP increase every time a croquette is fried? Is the entire price of the croquette—100 won—included in GDP, or is the sum of the croquette’s price and the cost of raw materials—160 won—included in GDP? The correct answer is neither. The amount counted toward GDP is only 40 won—the 100 won price of the croquette made by Mr. A minus the 60 won cost of raw materials. This amount is precisely the value added produced by Mr. A every time he makes a croquette.
In economics, value added refers to the new value created by an individual or a company during the production process. The products created by an individual or a company inevitably include products made by others as raw materials. In the case of the croquette shop mentioned earlier, this includes raw materials such as flour, potatoes, sausage, and onions, as well as energy sources like city gas. If Mr. A spends 60 won on raw materials to make a 100-won croquette, the value added newly produced in that process is 40 won. While the economic definition of value added is much more complex, for now, it suffices to understand it as the price remaining after subtracting the costs incurred in producing the product (such as raw material costs, fuel costs, and component purchase costs) from the product’s market price.
So why do we add only value added when calculating GDP, rather than summing the total revenue generated by all companies operating domestically? The reason is that if we were to add up all corporate revenue, the value of the produced goods and services would be counted multiple times. If we were to add up total revenue instead of value added, a statistical illusion would arise, making it appear as though more had been produced than was actually the case.
Revenue and GDP cannot be compared!
Today, most companies cannot produce all the raw materials, fuel, and parts needed for manufacturing on their own. Whether they are large corporations, small and medium-sized enterprises, or even a one-person operation, they have no choice but to purchase some of the raw materials and parts required for production from external sources. Even a smartphone the size of a palm is filled with parts from countless different companies, ranging from tiny screws to camera lenses and LCD screens. It is said that a single smartphone contains as many as 1,000 parts. A single car contains about 20,000 types of parts, totaling around 70,000 individual components. This gives us an idea of just how complex and multi-layered the process of supplying parts to companies can be.
When a company sells a product, the cost of the raw materials and parts they purchased is naturally included in the price. In other words, a company’s revenue includes the prices of raw materials and components it did not produce itself—what economists refer to as intermediate inputs (intermediate goods). The revenue of a second-tier supplier includes the prices of components purchased from third-tier suppliers, while the revenue of a first-tier supplier includes the prices of components purchased from both second- and third-tier suppliers. Furthermore, the price includes the cost of all raw materials and parts supplied by all suppliers.
When calculating GDP, simply adding up the total revenue of all companies results in the same raw materials and parts being counted multiple times. The reason we exclude the prices of intermediate inputs and only add the value added created during the production process is to accurately determine the value of the actual output produced. Therefore, GDP is calculated by either summing only the value added or by summing only the prices of final goods sold to consumers.
There is one more point to explain here. There are two types of GDP: “nominal GDP” and “real GDP.” You must be careful not to confuse these two or compare nominal GDP and real GDP together, as this will inevitably lead to statistically incorrect interpretations. What exactly are nominal GDP and real GDP, and why does this distinction exist?
The reason is simple. When measuring nominal GDP, even if the prices of goods and services have risen due to inflation compared to the past, these prices are reflected as-is in the calculation of GDP. However, when calculating real GDP, if the prices of goods and services have risen due to inflation, this price increase is factored out before calculating GDP. Since price increases are not factored in, the size of real GDP is inevitably smaller than that of nominal GDP. A clear difference can be seen when comparing the trends of South Korea’s nominal and real GDP.
Over time, the prices of almost all goods and services rise. Therefore, if these price increases are directly reflected in GDP, the economy appears to be growing even if the same quantity of goods and services is produced as in the past. Real GDP is a statistical measure designed to address this issue. It involves selecting a base year as the price benchmark and calculating GDP for a specific year based on the prices of goods and services in that base year. Since price fluctuations are factored out, it provides a clear picture of how much production has actually increased or decreased.
For 2018, the base year used to calculate real GDP is 2010. This means that the prices of goods and services are calculated based on 2010 prices. When the government or the media refers to GDP, they almost always mean real GDP. This is because using nominal GDP, which directly reflects price increases, does not accurately show how much the economy has actually grown.
Since no other statistic illustrates a country’s economic scale as clearly as GDP, it is not uncommon to directly compare a company’s revenue with GDP to show the share a specific company or industry holds in the national economy. Let’s calculate the share Samsung Electronics accounts for in South Korea’s 2017 GDP (1,555.9953 trillion won). Based on Samsung Electronics’ 2017 revenue (239.58 trillion won), the figure comes out to 15.39%. This is simply the result of dividing Samsung Electronics’ revenue by GDP. Of course, as in the economic article mentioned earlier, one might interpret this number as Samsung Electronics’ share of the Korean economy. However, this is a flawed comparison.
Considering the definition of GDP, making such a comparison is fundamentally flawed. The first reason is that Samsung Electronics’ revenue includes the prices of various raw materials and components it purchases, which are counted twice. The second reason is that GDP is a statistic that calculates only production activities occurring within the country. Many major Korean corporations already operate factories overseas that are larger than their domestic facilities. The production volume of these corporations overseas is generally much higher than their domestic production. Sales of products manufactured at overseas factories are recorded as corporate revenue but are not included in GDP to begin with. In 2017, Samsung Electronics generated 87% of its total revenue overseas. A significant portion of this came from products manufactured directly at overseas factories in countries such as China and Vietnam. Products manufactured directly overseas—as opposed to those manufactured domestically and then exported—are naturally not included in South Korea’s GDP.
Therefore, comparing corporate revenue to GDP is a flawed approach. Despite this statistical error, the practice of directly comparing corporate revenue with GDP remains widespread. This is because no other economic statistic is as widely recognized as GDP, nor is there any other figure that so intuitively illustrates the scale of the economy. Those concerned that wealth and economic power are becoming concentrated in large conglomerates cite statistics showing that “the combined revenue of the Samsung, Hyundai Motor, LG, and SK groups exceeds half of total GDP” to argue for stronger regulations. They argue that economic dependence on large corporations must be reduced through regulation of large corporations and support for small and medium-sized enterprises (SMEs).
On the other hand, those who prioritize market principles and the freedom of business activity counter, “If you directly compare corporate revenue with GDP in that manner, the combined revenue of SMEs would also exceed 100% of GDP.” They argue that as domestic conglomerates have grown into global corporations, their overseas production volumes have increased, raising the proportion of their revenue within GDP. The view is that conglomerates—which bring back the vast sums earned from producing and selling goods overseas and pay various taxes, including corporate income tax—are the backbone of the Korean economy. While there is no single correct answer, this is clearly an issue that warrants careful consideration.
