Question

What value does the market capture, and how? What value(s) does the market leave unaccounted for? Please explain. a. Please provide a step-by-step explanation for how the market assigns value. b. Please provide an explanation for the value(s) that the market leaves unaccounted for in its valuation process.  In terms of GDP

Answer 1

Market value is the price of an asset in the market. The value of an asset is determined by numerous factors such as number of investors, fluctuation in the international market, government policies and others. The market values of companies may range from as low as 1 million to several billions. Investors judge the value of an equity share based on its spot price and rate of returns and market reputation of company. The market values of an asset jumps down/upward during each phase of a business cycle.

The market does not consider economic values or benefits of environmental objects such as clean air and water, wild habitats and health benefits of people from clean sanitation. Market also does not assign value to any services such as charity activities and services by members in a family. Though these products and services are non monetary in nature, they have some extrinsic values.

a. The valuation of an asset in a market is determined by following steps:

Classification of Assets: The first and foremost step of asset valuation is classification of an asset for example, equity share, bonds, capital goods. Market assigns different values to different types of an assets. for example housing price is always higher than the share and bond prices. With each asset type, there are different valuation of each asset sub category for example luxury houses have higher values than non-luxury or economy houses.

Listing of assets in the market:: The next step is listing of assets by business companies in the capital market. Each company list a certain proportion of its assets known as equity share or stock in the market. The opening price of a stock is the initial price of equity share fixed by company. However the stock price may move upward or downward or remain constant depending upon the behavior of stock market.

Determining the actual rate of returns of assets: The investors weigh assets such as equity stocks based on its rate of return. The rate of return is the periodic interests that an asset will yield to investors. The rate of returns of equity shares are usually higher than the debt papers such as mutual funds and government securities. However, risks of investment in equity stocks is quite higher than investment in non-equity stocks. Therefore, small investors prefer to buy non-equity stocks that offer them a guaranteed rate of returns.

b. The calculation of national Gross Domestic product (GDP) does not include environmental factors, goods collected through illegal means such as theft and robbery. It also does not consider the voluntary social works of people and services of family members at home. However, these products and services obviously has some benefits and costs to the economy as a whole. For example, clean air, water and proper drainage systems produce positive health impacts on the people and saves their expenses on treatment and medicines. Similarly theft and robbery of public property obviously costs the government and it increases indirect expenses of the government. The voluntary social works such as charity programs and free medical treatment services are intended to provide benefits to the society as a whole. Each of these factors carries some degree of extrinsic value that is not measured in monetary terms. Due to this reason, many economists now advocate inclusion of environmental factors and voluntary social works in computation of GDP.