The Power of Profit (eBook)

Dr. Ali Anari obtained his PhD in Industrial Economics and Business Studies at the University of Birmingham, United Kingdom in 1978. He has more than 30 years research experience in developing computer-based economic models for economic analysis and forecasting in the areas of energy economics, macroeconomics, real estate economics, and regional economics. In his professional career Dr. Anari has been a research economist in the areas of national and regional economic modeling at the Center for Business and Economic Analysis in the Mays Business School at Texas A&M University, Visiting Scholar in the Anderson School of Management of the University of California, Los Angeles, research economist at the Imperial College of Science and Technology, London, research fellow at the University of Birmingham, U.K., and economic analyst at the economics and statistics department of National Iranian Oil Company. He has presented papers on economic modeling at conferences around the world and published book chapters and articles in such scholarly publications as the Journal of Money, Credit, and Banking, Journal of Applied Economics, Journal of Financial Research, Journal of Real Estate Economics, Journal of Economics and Business, Journal of Energy Policy, and Journal of Emerging Markets.  Current research interests include developing economic models for early warning of real estate bubbles, profitability and economic growth, and regional profitability analysis.         Professor James W. Kolari obtained his PhD in Finance at Arizona State University in 1980 and thereafter has taught financial markets and institutions at Texas A&M University in the Finance Department.  In 1994 he was awarded the JP Morgan Chase Professorship in Finance in the Mays Business School.  Dr. Kolari has more than 30 years research experience in the areas of computer-based modeling of financial markets (including stock, bond, and real estate markets), financial institutions (such as banks and insurance companies), and financial regulation.  Over the years, he has been a Visiting Scholar at the Federal Reserve Bank of Chicago, Fulbright Scholar at the University of Helsinki and Bank of Finland, Faculty Fellow with the Mortgage Bankers Association of America, and Senior Research Fellow at the Swedish School of Business and Economics (Hanken) in Finland, in addition to being a consultant to the U.S. Small Business Administration, U.S. Information Agency, American Bankers Association, Independent Bankers Association of America, and numerous banks and other organizations.  He has published over 100 articles published in refereed journals, numerous other papers and monographs, and 12 co-authored books.  His papers have appeared in such domestic and international journals as the Journal of Finance, Journal of Business, Journal of Money, Credit and Banking, Journal of Economic Dynamics and Control, Journal of Banking and Finance, Real Estate Economics, Journal of International Money and Finance, and Scandanavian Journal of Economics.  Papers in Dutch, Finnish, Italian, Swedish, and Russian have appeared outside of the United States.  He is a co-author of leading college textbooks in commercial banking and international business courses.         

The Power of Profit 1
Preface 5
Contents 6
1 The Role of Profit in Advanced Market Economies 10
2 Profit System Models of the Firm, Industry, and Business Sector 14
2.1 Theoretical Foundation of Profit System Models of the Firm 14
2.1.1 Mathematical Economic Approach to Obtaining a Profit System Model of Production 15
2.1.2 Accounting Approach to Obtaining a Profit System Model of Production 16
2.1.3 Profit System Model of Capital Stock 17
2.1.4 Profit System Model of Profit Margins 17
2.1.5 Profit System Model of Employment 18
2.1.6 Other Key Business Variables: Sales Tax, Depreciation, Total Employment Compensation, and Wage Rate 19
2.1.7 Profit System Channel of Inflation Transmission 19
2.1.8 Profit System Models of Deflated Output, Deflated Capital Stock, and Deflated Labor Productivity 20
2.1.9 Total Profit Equations 21
2.1.10 Profit System Economic Equilibrium 21
2.1.11 Profit System Theory of Economic Growth 22
2.1.12 Profit System Theory of Business Cycles 23
2.1.13 Financial Sector Variables: Interest Rate and Credit 24
2.2 Empirical Profit System Models in the Form of Dynamic Equations 24
2.2.1 General Approach 24
2.2.1.1 Profit System Models of the Goods and Services Market 26
2.2.1.2 Extended Profit System Model with Goods and Services Plus Labor Markets 31
2.3 Summary 33
2.4 Appendix: General Form of the Extended Profit System Model with Goods and Services Plus Labor Markets 35
3 A Macroeconomic Profit System Model of AdvancedMarket Economies 38
3.1 Macroeconomic Profit System Model 38
3.1.1 Business Sector Profit System Model 42
3.1.2 Nonprofit Sector Model 43
3.1.3 Combined Business Sector Profit System Model and Nonprofit Sector Model 44
3.1.4 The Monetary Policy Model 44
3.1.5 Debt Model 45
3.1.6 Macroeconomic Equilibrium 45
3.1.7 Channels of Inflation and Monetary Policy Transmission 46
3.1.8 Wicksell's Cumulative Process in the Macroeconomic Profit System Model 47
3.1.9 The Government Sector and Profitability 48
3.2 Application of the Macroeconomic Profit System Model to the US Economy 48
3.2.1 Data 49
3.2.2 Estimation of the Macroeconomic Model 53
3.2.3 Testing Model Reliability 60
3.2.3.1 Historical Simulation of the Estimated Macroeconomic Model 60
3.2.3.2 Out-of-Sample Forecasts of the Estimated Macroeconomic Model 66
3.3 Monetary Policy Analysis and the Impacts of Economic Stimulus Plans 70
3.3.1 Monetary Policy Analysis 70
3.3.2 Fiscal Policy Analysis 71
3.3.3 Macroeconomic Policy Analyses: A Scenario Approach 72
3.4 Business Cycle Analysis 78
3.5 Conclusion 86
4 Profit System Models of the Corporate Sector 90
4.1 Corporate Models 91
4.1.1 The Corporate Model 91
4.1.2 The Nonfinancial Corporate Model 93
4.2 Data for Estimating Corporate and Nonfinancial Corporate Sector Models 93
4.3 The Estimated Corporate Profit System Model 93
4.4 The Estimated Nonfinancial Corporate Sector Profit System Model 95
4.5 Stochastic Simulations of the Estimated Corporate Models 95
4.6 Out-of-Sample Forecasts of Corporate Profit System Models 98
4.7 A Quarterly Profit System Model of the Nonfinancial Corporate Sector 100
4.8 Conclusion 101
4.9 Appendix: Estimated Nonfinancial Corporate Profit System Model Using Quarterly Data Series: 1958Q12008Q4 102
5 Profit System Models for Industries 104
5.1 The Empirical Representation of the Model for Industries 104
5.2 Industry Data 106
5.3 Empirical Results 106
5.3.1 Mining, Quarrying, and Oil and Gas Extraction (NAICS 21) 108
5.3.2 Utilities Industry (NAICS 22) 109
5.3.3 Construction Industry (NAICS 23) 110
5.3.4 Manufacturing Industry (NAICS 31--33) 112
5.3.5 Wholesale Trade Industry (NAICS 42) 113
5.3.6 Retail Trade Industry (NAICS 44--45) 115
5.3.7 Transportation and Warehousing Industry (NAICS 48--49) 116
5.3.8 Information Industry (NAICS 51) 118
5.3.9 Finance and Insurance Industry (NAICS 52) 119
5.3.10 Professional and Business Services Industry (NAICS 54--56) 121
5.3.11 Education and Health Services Industry (NAICS 61--62) 122
5.3.12 Leisure and Hospitality Services Industry (NAICS 71--72) 124
5.4 Conclusion 125
6 A Profit System Model of Stock Market Valuation 127
6.1 A Profit System Model of the Standard and Poors Industrial Index 127
6.1.1 Stock Market Price Indexes 128
6.1.2 Data for Standard and Poor Industrial Index Firms 130
6.1.3 A Profit System Model for Stock Market Index Valuation 130
6.1.4 Estimated Profit System Model for the S& P Industrial Index Firms
6.1.5 Estimating S'P's Industrial Index of the Stock Market 133
6.2 Stock Market Capitalization 138
6.3 Conclusion 142
6.4 Table 6.1A: Firms in the Standard and Poors Industrial Index: Dollar Values Per Share Data for Fundamental Variables 143
7 A Profit System Model of the Firm for Business Analysisand Stock Valuation 144
7.1 Application of the Profit System Model to Firms 144
7.1.1 Empirical Model 144
7.1.2 Data Issues 146
7.2 Empirical Results for Two US Corporations 147
7.2.1 Data for Firms 148
7.2.2 Empirical Results for International Business Machines Corporation 148
7.2.3 Empirical Results for Johnson & Johnson
7.3 Further Discussion 158
7.3.1 Strategic Business Planning 159
7.3.2 Budgetary Control 159
7.3.3 Capital Budgeting Decisions 160
7.4 Conclusion 160
8 Concluding Remarks 162
References 165
About the Authors 174
Author Index 175
Subject Index 178