Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105764
Authors: 
Basu, Deepankar
Year of Publication: 
2012
Series/Report no.: 
Working Paper, University of Massachusetts, Department of Economics 2012-11
Abstract: 
This paper explains the BEA methodology for computing historical cost and replacement cost measures of the net stock of capital in the U.S. economy. It is demonstrated that there exists a threshold rate of inflation in the price of capital goods that keeps the percentage difference between the two capital stock measures constant. Hence, over periods when average inflation in the price index for capital goods is equal to the threshold value, historical cost and replacement cost profit rates would show equal percentage changes; 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. JEL Categories: E01, B51
Subjects: 
replacement cost
historical cost
capital stock
profitability trends
JEL: 
E01
B51
Document Type: 
Working Paper

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