A Macroeconomic Profit System Model of Advanced Market Economies
This chapter provides a two-sector macroeconomic model consisting of a business sector and a nonprofit sector. This profit system model is developed from the microprofit system model of the firm in Chapter 2. Using annual US macroeconomic data in the period 1959–2008, the empirical representation of the model is estimated, its reliability is tested, and different applications are investigated, including economic forecasting, monetary policy, fiscal policy, and business cycle analysis. In brief, the results demonstrate the crucial role of profits in the economy. Profit drives not only business sector and national output but is a prime determinant of capital stock and employment. Given the major influence of profits on the economy, it is not surprising that it also plays a role in the transmission of inflation. Moreover, we show that changes in profit can lead to business cycle fluctuations in economic activity.