Saturday, June 11, 2011

Nonfinancial Profits in the Context of GDP

The other day I showed you total corporate profits relative to GDP:

Graph #1

At first I said GDP was not a good context for profits. A friend disagreed, and I took a second look:

Graph #2

The two trend-lines are quite close, and they move up and down together. In other words, using GDP as a context for profits is comparable to using corporate deductions as a context.

That's good, because I want to use GDP as the context, again.

Yesterday I showed you a graph comparing corporate profit of the financial sector to that of the "nonfinancial" or productive sector. This graph:

Graph #3

Over the past 60 years, financial sector profits have grown from about 10% of total corporate profits to about half.

That is a significant change, I think.

Considering that financial-sector profits are a cost to the productive sector, and "nonfinancial" profits are the engine that drives production, I want to look at productive-sector profits in the context of GDP.

Here (again) is total corporate profits as a percent of GDP, in blue:

Graph #1 (repeated)

Now I add to the graph in red, total nonfinancial corporate profits relative to GDP:

Graph #4

It is a bit difficult to see, because both lines wander up and down, but the gap between the lines widens as time goes by.

Here is the same graph again, adding financial profits (again as a percent of GDP) in green, to show the growth of finance:

Graph #5

Finance is our growth industry. The product of finance is debt.

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