Measures of real profitability

Quarterly Bulletin 1978 Q4
Published on 01 December 1978

This research article has been prepared mainly by T. A. Clark and N. P. Williams of the Bank's Economic Intelligence Department.

Previous articles in the Bulletin have drawn attention to the decline since 1960 in companies' real profitability and to the rationale for emphasising the real rate of return on total trading assets rather than the rate of return measured in the traditional way, i.e. in terms of historic costs. This article examines longer term trends in real profitability, measured for the most part in terms of the share of profits in national income. Because of institutional changes, e.g. the trend towards incorporation and the widening of public ownership, the most appropriate measure of 'profits' in examining long-term changes is probably wider than 'company profits' as recorded in the national accounts. An estimate of 'total entrepreneurial profits' has therefore been made, comprising company trading profits and rent, the trading surpluses of public corporations and the profit element of self-employment income. Even this measure, however, is still biased because of changes in the relative size of the entrepreneurial sector over time. Figures are, therefore, also presented for the share of profits in companies' value-added, which overcomes the distortions arising from changes in the scale of the company sector relative to the economy as a whole.

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