How can business leaders make better production and capital
investment decisions? How can Wall Street analysts improve their
predictions of future stock market values? How can government
improve macroeconomic forecasts and policies? 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
free market 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
profitable firms. Despite the crucial importance of profits,
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 system model of the
firm grounded in basic accounting relationships in addition to the
well-known Cobb-Douglas production function, which can be applied
to individual firms, industries, and the business sector as a
whole.
Through rigorous data analysis, the authors show how the profit
system modelcan be applied to:
- modeling the U.S. business sector and national economy
- forecasting output, capital stock, total profit, profit rates,
and profit margins
- examining the relationships among profitability, economic
growth, and the business cycle
- simulating the effects of potential monetary policy changes on
the business sector and national economy
- valuing the Standard & Poor's stock market index as well as
individual firms.
The result is a model that integrates microeconomic and
macroeconomic factors and that can be widely applied in business
and economic decisions, policymaking, research, and teaching.
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