The Power of Profit

by Anari, Ali; Kolari, James

• ISBN13: 9781441906489
• ISBN10: 1441906487
• Format: Hardcover
• Copyright: 2009-12-30
• Publisher: Springer Verlag

Summary

How do business leaders make important capital investment decisions? How do Wall Street analysts track market fluctuations? How do regulators establish policies to maximize national output? In The Power of Profit, Anari and Kolari demonstrate how profit measures can be applied as the basis for these and many other applications of economic, policy, financial, and business analysis. The underlying theme of the book is that profitability is the driving force in advanced capitalist economies. Firms invest in capital, produce goods and services, and generate sales in an effort to reap profits. Firms that are unprofitable exit the marketplace and are replaced by other successful firms that earn profits. Despite the crucial importance of profits to business firms, however, there is no formal model that directly relates profits to capital formation and output. Previous studies over the past 100 years on profit and the economy are mainly descriptive in nature without any well-specified model grounded in microeconomic theory. Filling this gap, the authors present a profit-based model of the firm, grounded in the well-known Cobb-Douglas production function, and that can be applied to individual firms, industries, and the business sector as a whole. The book will be enhanced by on-line data sets, case examples, and additional resources. Ultimately, the principles of the profit-based model can be integrated into research and analysis in related fields, including economics and economic policy, finance, accounting, marketing, and strategy.

Table of Contents

The Role of Profit in Advanced Market Economies	p. 1
Profit System Models of the Firm, Industry, and Business Sector	p. 5
Theoretical Foundation of Profit System Models of the Firm	p. 5
Mathematical Economic Approach to Obtaining a Profit System Model of Production	p. 6
Accounting Approach to Obtaining a Profit System Model of Production	p. 7
Profit System Model of Capital Stock	p. 8
Profit System Model of Profit Margins	p. 8
Profit System Model of Employment	p. 9
Other Key Business Variables: Sales Tax, Depreciation, Total Employment Compensation, and Wage Rate	p. 10
Profit System Channel of Inflation Transmission	p. 10
Profit System Models of Deflated Output, Deflated Capital Stock, and Deflated Labor Productivity	p. 11
Total Profit Equations	p. 12
Profit System Economic Equilibrium	p. 12
Profit System Theory of Economic Growth	p. 13
Profit System Theory of Business Cycles	p. 14
Financial Sector Variables: Interest Rate and Credit	p. 15
Empirical Profit System Models in the Form of Dynamic Equations	p. 15
General Approach	p. 15
Summary	p. 25
Appendix: General Form of the Extended Profit System Model with Goods and Services Plus Labor Markets	p. 26
A Macroeconomic Profit System Model of Advanced Market Economies	p. 29
Macroeconomic Profit System Model	p. 29
Business Sector Profit System Model	p. 33
Nonprofit Sector Model	p. 34
Combined Business Sector Profit System Model and Nonprofit Sector Model	p. 35
The Monetary Policy Model	p. 35
Debt Model	p. 36
Macroeconomic Equilibrium	p. 36
Channels of Inflation and Monetary Policy Transmission	p. 37
Wicksell's Cumulative Process in the Macroeconomic Profit System Model	p. 38
The Government Sector and Profitability	p. 39
Application of the Macroeconomic Profit System Model to the US Economy	p. 39
Data	p. 40
Estimation of the Macroeconomic Model	p. 44
Testing Model Reliability	p. 51
Monetary Policy Analysis and the Impacts of Economic Stimulus Plans	p. 61
Monetary Policy Analysis	p. 61
Fiscal Policy Analysis	p. 62
Macroeconomic Policy Analyses: A Scenario Approach	p. 63
Business Cycle Analysis	p. 69
Conclusion	p. 77
Profit System Models of the Corporate Sector	p. 81
Corporate Models	p. 82
The Corporate Model	p. 82
The Nonfinancial Corporate Model	p. 84
Data for Estimating Corporate and Nonfinancial Corporate Sector Models	p. 84
The Estimated Corporate Profit System Model	p. 84
The Estimated Nonfinancial Corporate Sector Profit System Model	p. 86
Stochastic Simulations of the Estimated Corporate Models	p. 86
Out-of-Sample Forecasts of Corporate Profit System Models	p. 89
A Quarterly Profit System Model of the Nonfinancial Corporate Sector	p. 91
Conclusion	p. 92
Appendix: Estimated Nonfinancial Corporate Profit System Model Using Quarterly Data Series: 1958Q1-2008Q4	p. 93
Profit System Models for Industries	p. 95
The Empirical Representation of the Model for Industries	p. 95
Industry Data	p. 97
Empirical Results	p. 98
Mining, Quarrying, and Oil and Gas Extraction (NAICS 21)	p. 99
Utilities Industry (NAICS 22)	p. 100
Construction Industry (NAICS 23)	p. 101
Manufacturing Industry (NAICS 31-33)	p. 103
Wholesale Trade Industry (NAICS 42)	p. 104
Retail Trade Industry (NAICS 44-45)	p. 106
Transportation and Warehousing Industry (NAICS 48-49)	p. 107
Information Industry (NAICS 51)	p. 109
Finance and Insurance Industry (NAICS 52)	p. 110
Professional and Business Services Industry (NAICS 54-56)	p. 112
Education and Health Services Industry (NAICS 61-62)	p. 113
Leisure and Hospitality Services Industry (NAICS 71-72)	p. 115
Conclusion	p. 116
A Profit System Model of Stock Market Valuation	p. 119
A Profit System Model of the Standard and Poor's Industrial Index	p. 120
Stock Market Price Indexes	p. 120
Data for Standard and Poor Industrial Index Firms	p. 122
A Profit System Model for Stack Market Index Valuation	p. 122
Estimated Profit System Model for the S&P Industrial Index Firms	p. 124
Estimating S&P's Industrial Index of the Stock Market	p. 125
Stock Market Capitalization	p. 130
Conclusion	p. 134
A Profit System Model of the Firm for Business Analysis and Stock Valuation	p. 137
Application of the Profit System Model to Firms	p. 137
Empirical Model	p. 137
Data Issues	p. 139
Empirical Results for Two US Corporations	p. 140
Data for Firms	p. 141
Empirical Results for International Business Machines Corporation	p. 141
Empirical Results for Johnson & Johnson	p. 147
Further Discussion	p. 151
Strategic Business Planning	p. 152
Budgetary Control	p. 152
Capital Budgeting Decisions	p. 153
Conclusion	p. 153
Concluding Remarks	p. 155
References	p. 159
About the Authors	p. 169
Author Index	p. 171
Subject Index	p. 175
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