Monday, August 28, 2006

Depreciation and the Profit Margin Puzzle

Dean Baker provides (a small) part of the answer to my “profit margin puzzle” (although he doesn’t frame it in those terms). Gross profit margins (represented by the divergence between the GDP deflator and unit labor cost) partly had to rise to compensate for increased depreciation, to keep net profit margins from falling. In other words, if you know your capital will have to be replaced more often, you have to charge more for your products in order to make provision for that replacement. However, for the period I looked at (starting in 1991) depreciation as a fraction of GDP rose only from 12.1% to 12.9%. Since the GDP deflator diverges from unit labor cost by an average of more than 0.5% per year over 15 years, this roughly 0.8 percentage point difference just chips away at the puzzle (less than 2 years worth out of 15).

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4 Comments:

Anonymous Anonymous said...

Knzn, in Econopinning, Epstein makes the point that the profit/gdp at record heights issue is an illusion. Basically, its cos the more profitable finance sector has grown in magnitude as a percentage of gdp. (Think; with the aging of the US, deaths per year will surely rise; we dont ask, well, whats causing all these deaths, do we?).
By the way, I think youd like the book. It touches on lots of stuff you mention re employment data etc on this blog.

Tue Aug 29, 12:03:00 AM EDT  
Blogger reason said...

mvpy...
and why has the finance sector grown? And why is more profitable? (I thought it was deregulated and there were fewer barriers to entry -that should make it grow, but should make profits fall.) That is like saying there is no puzzle, firms are just more profitable.

Wed Aug 30, 04:32:00 AM EDT  
Blogger psikeyhackr said...

Oh yeah, The depreciation of automobiles purchased by consumers is irrelevant. The economics profession has defined it as such. But the purchased of automobiles by consumers get added to GDP.

Maybe someday economists will learn to do algebra or accounting will be mandatory in the schools.

GlobaLIES

psik

Tue Mar 13, 07:04:00 PM EDT  
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