About value (2)

Financial crises and their implications will at least have had the merit of making the economy the focal point of concern for European citizens. There is no doubt that younger generations will now know that if they borrow money, they will have to pay it back one day.

Beyond this basic principle forgotten over past decades, more abstract notions such as GDP, budget deficit and changes in interest rates are all making the headlines now. These notions merit a more in-depth look in order to better understand events and try to reconcile the irreconcilable: namely the financial world and the world’s citizens.

The INSEE states that “Gross Domestic Product” is equal to the sum of the value added by resident economic players …(1).” Via the calculation of GDP, a community (state) can both identify sources of wealth creation, measure the strengths and weaknesses in this field by comparison with peers and if necessary, utilise this value to reassure and/or trust those that would like to lend it capital.

In the calculation of GDP, value added is clearly at the heart of wealth creation in the community: if there is no value added, there is no GDP!

Beyond its accounting definition (1), literally speaking, valued added is the value that a person adds via his work and his expertise. It is the service offered to third parties prepared to pay the price for it. With these tools, it is easier to compare wealth creation in one country relative to another: GDP per inhabitant, or in other words, the value that each person adds is an excellent indicator for rapidly assessing the state of development of a country.

For example, bearing in mind that each Chinese person adds around $7,500 in value to his community, it seems more difficult to ask them to aid European citizens that produce $30,000 in value, but lack debt in order to continuing generating this amount…

From a micro-economic stance, value added (from bottom to top?) is above all the sum left over for a company to pay those that enabled it to add value. Firstly, employees via their wages and then investments (depreciation and amortisation) necessary for providing the service, followed by banks who lend money to finance the business and which request interest payments, the state, which is always looking for means for the community, and finally, shareholders who are rewarded either via dividends or via the increased wealth of the company and its equity.

Since the 1980s, all studies are categorical (2) in stating that the division of this value added has clearly favoured companies and their shareholders: the share set aside for wages, banks, the state and investment has declined in relative value, whereas company net margins have been clearly favoured.

However, for the past few years, the stockmarket has refused to objectively reflect the value accumulated by companies. Prices of assets that add value have fallen whereas those of fixed assets (property, art works) have rapidly increased. Yields have replaced risk and fear of the future the desire to win.

Faced with the stagnation of the sum of value added (GDP), European shareholders are legitimately doubting the future division of GDP. And yet, would not a division that provides more room for investment and employees be one of the keys for future growth in our economies?


(1) www.insee.fr
(2) INSEE: 2009 report on sharing of value added, sharing of profits and wage differences in France