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.
