Piketty's Capital

## Chapter 1

* GDP: the total of goods and services produced in a given year within the borders of a given country.
* National income: subtract from GDP the depreciation of the capital that made this production possible (i.e. wear and tear during the year in question). This depreciation is substantial, today on the order of 10 percent of GDP in most countries
* When depreciation is subtracted from GDP, one obtains the “net domestic product,” which I will refer to more simply as “domestic output” or “domestic production,” which is typically 90 percent of GDP
* Then one must add net income received from abroad (or subtract net income paid to foreigners, depending on each country’s situation). For example, a country whose firms and other capital assets are owned by foreigners may well have a high domestic product but a much lower national income, once profits and rents flowing abroad are deducted from the total. Conversely, a country that owns a large portion of the capital of other countries may enjoy a national income much higher than its domestic product
* **A country’s national income may be greater or smaller than its domestic product, depending on whether net income from abroad is positive or negative. When net income from abroad is negative, then national income < domestic product**
* National income is also called “net national product” (as opposed to “gross national product” (GNP), which includes the depreciation of capital). Net income from abroad is defined as the difference between income received from abroad and income paid out to foreigners. These opposite flows consist primarily of income from capital but also include income from labor and unilateral transfers (such as remittances by immigrant workers to their home countries).
* The vast majority of domestic production is undertaken by factors of production owned by domestic citizens (national income is about 90 percent of net domestic product). However, key differences do exist. The five main differences between net domestic product and national income are (1) indirect business taxes, (2) business transfer payments, (3) net foreign factor income, (4) government subsidies less surplus of government enterprises, and (5) statistical discrepancy
* NI = NDP - Indirect Business Taxes - Business Transfer Payments + Net Foreign Factor Income + Government Subsidies less Current Surplus of Government Enterprises - Statistical Discrepancy
* National income = capital income + labor income
* Capital in all its forms has always played a dual role, as both a store of value and a factor of production.
* Each of these two types of capital (real estate/infrastructure etc. & machines etc.) currently accounts for roughly half the capital stock in the developed countries
* Define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market. It consists of the sum total of nonfinancial assets (land, dwellings, commercial inventory, other buildings, machinery, infrastructure, patents, and other directly owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance policies, pension funds, etc.), less the total amount of financial liabilities (debt).
* If we look only at the assets and liabilities of private individuals, the result is private wealth or private capital. If we consider assets and liabilities held by the government and other governmental entities (such as towns, social insurance agencies, etc.), the result is public wealth or public capital.
* Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets).
* I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corporation that holds patents, as is more commonly the case). More broadly, many forms of immaterial capital are taken into account by way of the stock market capitalization of corporations
* National wealth = national capital = domestic capital + net foreign capital/assets
* On the eve of World War I, Britain and France both enjoyed significant net positive asset positions vis-à- vis the rest of the world.
* Income is a flow. It corresponds to the quantity of goods produced and distributed in a given period
* Capital is a stock. It corresponds to the total wealth owned at a given point in time. Th is stock comes from the wealth appropriated or accumulated in all prior years combined.
* The most natural and useful way to measure the capital stock in a particular country is to divide that stock by the annual flow of income. This gives us the capital/income ratio, which I denote by the Greek letter β. For example, if a country’s total capital stock is the equivalent of six years of national income, we write β = 6 (or β = 600%).
* In the developed countries today, the capital/income ratio generally varies between 5 and 6, and the capital stock consists almost entirely of private capital.
* In France and Britain, Germany and Italy, the United States and Japan, national income was roughly 30,000– 35,000 euros per capita in 2010, whereas total private wealth (net of debt) was typically on the order of 150,000–200,000 euros per capita, or five to six times annual national income.
* β is greater than 6 in Japan and Italy and less than 5 in the United States and Germany.
* Income disparities are partly the result of unequal pay for work and partly of much larger inequalities in income from capital, which are themselves a consequence of the extreme concentration of wealth.
* In practice, the median income is generally on the order of 20– 30 percent less than average income.

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the capital stock in the developed countries currently consists of two roughly equal shares: residential capital and professional capital used by firms and government.

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* The share of income from capital in national income is denoted α.
* α = r × β → if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent
* The rate of return on capital measures the yield on capital over the course of a year regardless of its legal form (profits, rents, dividends, interest, royalties, capital gains, etc.), expressed as a percentage of the value of capital invested
* The average long- run rate of return on stocks is 7–8% in many countries. Investments in real estate and bonds frequently return 3–4%, while the real rate of interest on public debt is sometimes much lower.
* The annual output to which I refer here corresponds to what is sometimes called the firm’s “value added,” that is, the difference between what the firm earns by selling goods and services (“gross revenue”) and what it pays other firms for goods and services (“intermediate consumption”). Value added measures the firm’s contribution to the domestic product. By definition, value added also measures the sum available to the firm to pay the labor and capital used in production. I refer here to value added net of capital depreciation (that is, after deducting the cost of wear and tear on capital and infrastructure) and profits net of depreciation
* In developed world:
	+ Return on real estate, 4– 5 percent
	+ Stock-market capitalization of listed companies in various countries generally represents 12 to 15 years of annual profits, which corresponds to an annual return on investment of 6–8 %
* the metal and energy sectors are more capital intensive than the textile and food processing sectors, and the manufacturing sector is more capital intensive than the service sector.
* To summarize:
	+ β: Capital/income ratio
	+ α: Capital’s share in income
	+ r: the rate of return on capital
* The higher the savings rate and the lower the growth rate, the higher the capital/income ratio (β).
* Marginal productivity of capital: the additional output due to adding one new unit of capital “at the margin” - which is low when a country is flush with savings and capital (i.e. little reason to build new housing or add new machinery)
* When a country is largely owned by foreigners, there is a recurrent and almost irrepressible social demand for expropriation. Other political actors respond that investment and development are possible only if existing property rights are unconditionally protected. Inequality of capital ownership is already difficult to accept and peacefully maintain within a single national community. Internationally, it is almost impossible to sustain without a colonial type of political domination

### Chapter 2

* Growth always includes a purely demographic component and a purely economic component, and only the latter allows for an improvement in the standard of living.
* An apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality.