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.
