# [OPE-L] calculating the not rate of profit

Date: Thu Apr 05 2007 - 18:49:08 EDT

```Well I am not an expert on this, but least 5 broad empirical notions of
depreciation could be distinguished:

1. Depreciation in the annual report of a company or business entity
2. Depreciation charges as submitted for tax purposes
3. Tax-assessed depreciation, in accordance with official depreciation
schedules (which may include incentives)
4. Economic depreciation, calculated e.g. according to statistical
observations of the current market value of depreciated assets and service
lives or discounted cash flows/profit rates.
5. Macroeconomic consumption of fixed capital, which may include in addition
to economic depreciation also certain additional expenses related to the
acquisition and maintenance of fixed capital assets.

I briefly outlined some of the simplest notions here:
http://en.wikipedia.org/wiki/Consumption_of_fixed_capital and the article
http://en.wikipedia.org/wiki/Depreciation (which I did not write) goes more
into depreciation techniques such as straight-line and declining balance.

Philip Armstrong, Andrew Glyn and John Harrison offer some useful discussion
in the data appendix to their book "Capitalism Since World War II" (Fontana,
1984). Typically most profitability time series data are based on a ratio
between a profit volume taken from value-added data, and fixed capital
stocks. But this is at best a proxy for real business profitability, which
at best only shows the trend. Dumenil & Levy as I recall did some research
which showed that most of the commonly used profitability measures will show
the same sort of historical trend and fluctuations. In other words you can
say the trend is up or down, or that it is accelerating or decelerating, but
not much more.

Knowing the market value of capital assets is important if you are buying or
selling them, but especially if you are only using them, it may be difficult
to say what they are worth, and in the end, what they are worth, is what you
can sell them for. The user of a capital asset is often not primarily
interested in its stock value, but in the revenue stream it can generate,
its earnings potential (which may strongly influence its market valuation).

Most statisticians agree that the "true" values of capital assets are,
macroeconomically speaking, very difficult to measure, you have to make many
assumptions, and even if you have a standard procedure in place to measure
their value, it may be difficult to know what that means, since the measured
value may still deviate significantly from actual valuations made in the
marketplace. The only practical use of a standard macro-economic measure is
to indicate approximately the historical trend in the stock, or give an
indication of size and proportion. In another article
http://en.wikipedia.org/wiki/Capital_formation I mentioned that according to
US budget data the US tangible capital stock had roughly doubled in value
since 1980, but in what way that is really true, is a moot point.

The general trend in international accounting practice is to measure capital
assets at their current market value. One reason for that is that
corporations nowadays invest in assets much more often for speculative
purposes.

Whatever the case, depreciation measures strongly affect gross and net
profit measures. BEA has some papers on corporate profit measures here:
http://www.bea.gov/papers/pdf/nabeprofits_fv.pdf (nice pictures) and
http://www.bea.gov/papers/pdf/corp_pr1.pdf

But hey, where's my Easter egg?!

Happy Easter, all...

Jurriaan
```

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