The Determinants of Profit Growth in the Manufacturing Sectors

The central driving force behind a capitalist economy is the pursuit of profits. Profits provide a critical source of financing for capital expansion which results in future profit growth, and create the basis upon which markets assign values to companies and industries. Economists and financial professionals have shown a renewed interest in the determinants of profit change as the inflation experience of the 1970s indicated that profit levels and growth can be artificially inflated during periods of rapid price change. Inflation induced profit growth is the result of calculating inventory profit on an historical cost basis rather than on a replacement cost basis and under depreciating assets during periods when the replacement cost of capital is rising. In both instances the firm and/or the industry records positive incremental profit change which is only transitory.