Replacement versus Historical Cost Profit Rates: What is the diff erence? When does it matter?


Deepankar Basu

January 4, 2012

Abstract
This paper explains the BEA methodology for computing historical cost and replacement (current) cost measures of the net stock of capital in the U.S. economy. Historical cost profit rates are counter-clockwise (clockwise) rotated versions of replacement cost profit rates during periods of inflation (disinflation) in the price of capital goods. Hence, during periods when the price index for capital goods is flat, the two profit rates move together; an example of such a period for the U.S economy is the whole postwar period 1946–2010. Moreover, trends in both replacement cost and historical cost profit rates display very similar movements over long periods, making the choice of capital stock valuation irrelevant for empirical analysis of profitability
trends.

Keywords: replacement cost, historical cost, capital stock, profitability trends.
JEL Codes: E01, B51.

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