4. Profit System Models of the Corporate Sector

This chapter applies the profit system model to the US corporate sector. The US corporate sector produced more than 75 percent of the output of the US business sector and about 60 percent of the US GDP in recent years. Like the aggregate business sector model in Chapter 3, estimated corporate sector models can be used for (1) forecasting the volumes of output and capital stock as well as profit rates, profit margins, and aggregate profits in the corporate sector; (2) macroeconomic policy analysis; and (3) business cycle analysis. However, here we focus on the aggregate profit of the corporate sector. The aggregate profit of the corporate sector is a crucial variable because its level and growth rate have important implications for market economies. Higher growth rates of aggregate corporate profits suggest that more business investments are passing the market tests of profitability. The historical simulation of aggregate corporate profit provides insights into its long-run path based on the values of fundamental variables, such as sales, capital stocks, profit rates, and profit margins. When aggregate corporate profit is discounted using an appropriate capitalization rate, the result is the total market valuation of aggregate corporate stocks. Chapter 6 extends the analyses to this stock market application.