Refining Estimation of Global Stock of Knowledge Assets

The estimate I gave in the previous blog post of the global stock of knowledge assets can be refined further. Let me warn you that the estimation procedure requires making assumptions that are open to question.

I sorted the 215 Yahoo Finance industry groups into primary (agriculture, forestry, mining), secondary (agri-processing, industries, manufacturing) and tertiary (services) sectors, and averaged each sector’s price-to-book ratio (PBR) reported on April 5, 2009. I then computed the intangibles-to-price ratio as (PBR-1)/PBR. The results were 49.6%, 63.5% and 79.1%. As I expected, the service sector has the greatest intangibles-to-price ratio.

The latest World Bank’s data on Gross World Product (GWP) by sector are: 3%, 28% and 69%. Using the results above, the percent of GWP from intangible assets in the primary, secondary and tertiary sectors are, respectively, 1.5%, 17.8% and 54.6% or a total of 73.87% of Gross World Product are contributed by intangible assets. This is close to my previous assumption of 70%. The rest, or 26.1%, is contributed by tangible assets (book value).

Next we look at discount rate. As I said, central banks had recently been dropping interest rates, and so we cannot use the abnormally low prevailing interest rates (0.5%). I plotted the historical data of discount rates set by the US Federal Reserve since January 1950 from the Financial Forecast Center:

History of US Federal Reserve discount rate since 1950

History of US Federal Reserve discount rate since 1950

The half-century average is 5.1% which we assume to hold over the next decades. However, US discount rates are normally lower than those in capital-scarce developing countries. So we adopt a 6% per annum figure for our global estimates, and a bracket of 5% to 7% per annum.

The NPV of the future stream of GWP from intangibles, using 2008 GWP = $62.25 trillion, is between $657 trillion and $920 trillion. At 6% per annum, the middle estimate of NPV of intangibles = $766 trillion.

If we assert that most of these intangibles are knowledge assets, then the (upper limit of) global stock of knowledge assets stand at about $766 trillion. This is an upper limit because we saw in F1- KM is not enough! that value creation is due to both cognitive (knowledge) and non-cognitive (motivational) factors.

Compare this figure with:

    US GDP in 2008 = $14.33 trillion
    World GDP in 2008 = $62.25 trillion
    Global financial losses from recent crisis = $50 trillion
    Total US Federal debt = $65.5 trillion
    US human and social capital in 2006 = $153 trillion (estimated by Dr. Gary Becker of the University of Chicago)

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4 Responses to “Refining Estimation of Global Stock of Knowledge Assets”

  1. Daniel Bowers Says:

    Hello,

    My name is Daniel Bowers. I’m an engineering student at Arizona State University, and my team is doing a design project requiring us to do economic analysis for a future period of time.

    Would you allow us to use your Fed discount rate graph in our slideshows and portfolios? We would include a reference to your blog, and we’re not making money –– it’s simply a class assignment. Thank you for your time.

    Daniel Bowers

  2. apintalisayon Says:

    Sure, David. Don’t forget to acknowledge primarily the Financial Forecast Center as the source of data. All I did was put the data in graphical form.

  3. Cumulonimbus + AgI = ?? « Truth Before Dishonor Says:

    [...] Below is a chart showing the historic levels for the Discount Rate, from a 2009 article on Apin Talisayon’s Weblog (data obtained from the Financial Forecast Center). I added a red line at 6 percent for [...]

  4. Cumulonimbus + AgI = ?? « THE FIRST STREET JOURNAL. Says:

    [...] Below is a chart showing the historic levels for the Discount Rate, from a 2009 article on Apin Talisayon’s Weblog (data obtained from the Financial Forecast Center). I added a red line at 6 percent for [...]

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