Cambridge Journal of Economics 1982, 6, 185-194

NOTE
The rate of profit over the business cycle
Robin Hahnel and Howard Sherman*

Many different business cycle theories focus on the rate of profit as a key variable. Let us
define P as total 'profits', including all corporate and non-corporate profits, all rents and
interest income. The 'rate of profit' is defined here as profit (P) to capital (K), so the rate of
profit is P/K. Define Y as national income. By definition the rate of profit may be written as
the profit share (/>/ Y) times the output to capital ratio (Y/K):
P P Y
=-
CD
y
K Y K
'
In short-run business cycle analysis, it must be recognised that actual output (Y) hardly
ever equals e potential output (Z) which might be produced at full utilisation of capacity.
The ratio between actual output and potential full-capacity output is defined to be the
'capacity utilisation ratio' or Y/Z. Including this factor, the rate of profit may be written as:

L-t.L.L

2)

(
K
K~Y
Y K
'
which is also true by definition, but provides the basic framework used here.
Thomas Weisskopf, in an article in this Journal (Weisskopf, 1979), first used this framework. He argued that these three components of the profit ratethe profit share (P/ Y), the
capacity utilisation ratio (Y/Z), and the potential output-capital ratio (Z/K)each represent
the factors stressed by one set of business cycle theories. Some 'reserve army' theorists
stress the influence of the profit share, which they see reduced by rising wages, caused by a
declining reserve army of unemployed. Some 'underconsumptionists' stress the influence of
capacity utilisation, which they see as limited by effective demand. Some 'over-investment'
theorists stress the influence of the potential output-capital ratio, which they see as reduced
by too rapid capital accumulation causing shortages, bottlenecks, disproportions, and
inefficient operations.
Weisskopf found that the rapid increase in the profit rate during the early expansion of
each cycle is 'almost entirely attributable to the corresponding improvement... in conditions
of realisation [reflecting in rising capacity utilisation, Y/Z]' (Weisskopf, 1979, p. 365).
Second, in late expansion he found that the rate of profit usually declines somewhat before
the peak, and that the main reason for this decline is a falling profit share. The profit share
declines, according to Weisskopf, because wage gains are greater than productivity gains in
*American University and University of California, Riverside. The authors wish to thank (1) an anonymous
referee for some extremely useful and constructive criticisms: and (2) the U.C., Riverside, Committee on Research
forfinancialsupport.

186

R. Hahnel and H. Sherman

this cycle phase. Third, he found that the rapid decrease in the rate of profit during the
contraction is 'almost entirely attributable to the corresponding... deterioration in conditions of realisation [reflected in falling capacity utilisation, Y/Z]' (Weisskopf, 1979, p.
365).
The purpose of this note is to examine Weisskopf sfindingswithin an alternative empirical
framework which we believe is more appropriate for analysing the cyclical movements in the
components of rate of profit

The cyclical pattern of profit rates

The most convenient device for describing cycle patterns is the nine-stage approach
developed by Wesley C. Mitchell and the National Bureau of Economic Research (NBER).
The NBER quarterly US dates for trough to trough cycles are: cycle 1 is 1949, fourth quarter
(writtenas 1949.4) to 1954.3; cycle 2 is 1954.3 to 1958.2; cycle 3 is 1958.2 to 1961.1; cycle 4 is
1961.1 to 1970.4; and cycle 5 is 1970.4 to 1975.1. Cycle 6 is (at the time of this writing) only
half completed, from a trough in 1975.1 to a peak in 1980.1
Stage 1 of each cycle is its initial trough, stage 5 is the cycle peak and stage 9 is the final
trough. Stages 2, 3, and 4 equally divide the expansion, while stages 6, 7, and 8 equally divide
the contraction. The level at each stage is expressed as a percentage of the average value over
the whole cycle. The cycle average is set equal to 100, so 83% is stated as 83. Table 1 shows,
for example, that in the 1970 to 1975 cycle the rate of profit rose rapidly in expansion till
stage 4, then fell to stage 9, the final trough. (The average rate of profit was 14-596, so that
equals 100.)
Table 1. Rate of profit (P/K), fifth cycle (1970.4 to 1975.1) (level at each of nine cycle stages in
percentages of cycle average)
Cycle stage
Rateofprofit"

1 2 3
97-5

99-7

4
103-4

106-4

5
103-9

6
99-6

92 1

86-3

9
820

Sources: see Appendix for sources and definitions.

Rate of profit equals profit divided by capital stock.

What we actually want to know, however, are the rates of change from stage to stage, not
merely the level. We measure the total change from stage to stage, then divide by the number
of months from the midpoint of one stage to the midpoint of the next. The result is the
change per month in each 'segment', where a segment is one stage to stage change. The
changes for the eight segments of the 1970-75 cycle are shown in Table 2. The first half of
expansion saw a steady growth of the profit rate, then came slower growth, slow decline, and
finally rapid decline.
Table 2,. Rate of profit (PAH), fifth cycle, (1970.4 to 1975.1) (change per month, as percentage of cycle
average, from stage to stage)
Segment
Rate of profit

1-2

2-3 3-4
4-5
EXPANSION
PEAK
0-33 0-33 0-26 - 0 38

Sources: see Appendix for sources and definitions.

5-6

6-7
7-8
8-9
CONTRACTION
- 1 46 - 1 - 6 7 - 1 27 1 45

Profit rate over the business cycle

187

The profit rate and its components in cyclical expansions

How does the profit rate and its three componentse profit share (P/Y), capacity
utilisation (Y/Z), and potential output to capital (Z/K)behave over the expansion phase of
the cycle? We examine the entire period from 1949 to 1980, but it would be misleading
merely to present an average of all six cyclical expansions. As David Gordon (Gordon, 1981)
and many others have noted, profits and productivityand many other economic
variablesbehaved very differently in the 1970s from their behaviour of the 1950s and
1960s.
We take as one period the four cyclical expansions from 1949 to 1969. In this period,
effective demand was relatively high because of a large military demand (the Korean and
Vietnam wars) and a large export demand by Europe and Asia. Investment was high with
productivity rising rapidly, while costs of raw materials were held down by US control of
many Third World countries. Employment and capacity utilisation were high. Profit rates
were very strong because of the low costs and high demand.
We treat the two expansions of 1970 to 1973 and 1975 to 1980 as quite a different type of
period. Costs of raw materials were rising, while military demand and demand for exports
were quite limited. Therefore, unemployment was higher, investment less, productivity less,
and the result was a lower profit rate. The 1970-1973 expansion was also affected to some
extent by the Nixon wage and price controls, which held wages to a lower rate of growth than
prices.
According to Table 3, in the average of the four expansions of the 1950s and 1960s, the
rate of profit rose most rapidly in early expansion, rose slower in mid-expansion, then fell in
the last half of expansion. The first explanatory factor is the profit share. The profit share
rose in early expansion (to stage 2), fell a little in mid-expansion, and fell considerably in the
last half of expansion. So the profit share is some help in the explanation, but is far from the
only factor, especially because it moved contrary to the profit rate in the second segment.
Capacity utilisation in the 1950s and 1960s moved up very rapidly in the first half of
expansion, probably 'explaining' much of the profit rate increase of that phase. Capacity

Table 3. Expansion behaviour of the profit rate and its components (stage to stage changes, as
percentage of cycle average, per month)
A. Average of four cycle expansions, 194 9-1970

Segments

1-2

Profit rate (P/K)

Profit share (P/Y)
Capacity utilisation (Y/Z)
Potential output to capital (Z/K)

0-80
0-40
0-83
-0-49

4-5

2-3

0-25
-001
0-53
-0-28

-1-44
-0-35
- 0 05
- 0 03

1 41
1 31
004
-115

B. Average of two cycle expansions, 1970-1980

Profit rate (P/K)

Profit share (/>/ Y)
Capacity utilisation ( Y/Z)
Potential output to capital (Z/K)
Sources: for sources and definitions, see Appendix.

0-64
0 51
0-20
- 0 05

0 36

0 28

013

012

0-40
- 0 20

0 39
-0-22

-0-38
-018
-006
-014

188

R. Hahnel and H. Sherman

utilisation was almost constant, however, in the last half of expansionso the declining profit
rate was mainly 'explained' by the declining profit share.
Finally, the potential output to capital ratio moved downward in the first half of
expansion in the 1950s and 1960s, so it can not be used to explain the upward movement of
the profit rate. In the last half of expansion, it declined slowly, so it may help a little in
explaining the profit rate decline. (Note that any discussion of the ratio of potential output to
capital is suspect because of the theoretical and empirical weaknesses in the concept and its
measurement, discussed in a later section of this article.)
In the 1970s, the main difference is that the profit rate rose rapidly for most of the business
expansion (though slower and slower), then fell just before the peak. The profit share and
capacity utilisation both did roughly the same, rising in most of the expansion, then declining
before the peak. The most that one can say is that both factors probably had some effect on
the profit ratewith capacity utilisation being a little more influential in mid-expansion, and
the profit share being a little more influential just before the peak. The potential output to
capital ratio moved down, while the profit rate moved up, in the first three segments of
expansionso it does not help in explaining the rise of the profit rate. Just before the peak, it
did move down as the profit rate moved down. These results, so far, confirm Weisskopf s
findings, discussed earlier.

The profit rate in contraction

As shown in Table 4, the rate of profit declined throughout the four mild recessions of the
1950s and 1960s (declining slower and slower as the recessions continued). The profit rate
declined far more rapidly throughout the depression of 1973-1975. Since the profit rate
declines in every contraction, capitalists are hurt by contractions, and hurt worse the deeper
the contraction. Unfortunately, the capitalist system produces contractions as a result of the
contradictions that arise in every expansion, and requires contractions as the only way of
resolving those contradictions.
Table 4. Contraction behaviour of the profit rate and its components (stage to stage changes, as
percentage of cycle average per month)
A. Average of four cycle contractions, 1949-1970

Segments

6-7

5-6

Profit share (P/K)

Profit share (P/Y)
Capacity utilisation (Y/Z)
Potential output to capital (Z/K)

1 24
-0-70
-118

0-55

-0-85
-0-30
121
0 60

7-8

8-9

-0-75
-015
-1-30
0-72

-008
016
- 0 69
0 49

-1-27
- 0 63
- 1 05
0-28

1 45
- 0 50

B. Depression of 1973-1975

Profit rate (P/K)

Profit share (P/Y)
Capacity utilisation (Y/Z)
Potential output to capital (Z/K)
Source: see Appendix for sources and definitions.

-1-46
- 0 95
-0-53

-001

-1-67
- 1 04
- 0 25
-0-40

-3-33
2 40

Profit rate over the business cycle

189

Notice that the profit share of income declines throughout the 1973-75 depressionand
also declines throughout the average recession of the 1950s and 1960s (except for the
segment just before the final trough). This behaviour is, of course, contrary to the hypothesis
that the profit share rises as unemployment risesexcept that one may argue it does operate
with a long time lag in the last part of the contractions of the 1950s and 1960s. Whatever
causes this falling profit share in the contraction, it does have some effect on the falling profit
rate. The falling profit share, however, does not reflect falling unemployment, because
unemployment is rising. Thus, this study, as well as Weisskopf s study (1979), finds that the
rising reserve army of unemployed workers does not explain profit rate behaviour in
recessions or depressionsexcept maybe at the very end of some recessions.
The ratio of potential output to capital mostly rises in contractions, and therefore is of little
help in explaining the declining rate of profit.
Finally, bo this study and Weisskopf s study find that e strongest factor causing the
downturn in profit rates throughout the contraction is the falling ratio of capacity utilisation.
It declines rapidly throughout every stage of the average recession of the 1950s and 1960s
and throughout every stage of the depression of 1973-75 (most rapidly in the last stage). The
behaviour of capacity utilisation closely mirrors the behaviour of demand over the cycle, so it
reflects the limitations on the capitalist's ability to realise the profits that have been exploited
from workers.

Tentative conclusions from cycle patterns

The tentative conclusion from the data to this point is that the profit rate is most influenced
by the profit share before the cycle peak, but is most influenced by capacity utilisation in
most of expansion and throughout the contraction. Weisskopf speaks as if these cause and
effect conclusions are proved directly by the movements of the components of the identity
equation at different phases of the cycle. There are, however, several warnings that must be
taken very seriously in interpreting the above picture: they are (1) the problem of cause and
effect, (2) the facts of time lags, (3) the facts of different behaviours in different cycles, and
(4) deficiencies in the data.
First, the fact that two things move together does not prove which one affects the other.
For example, the profit share may be affected by the profit rate, rather than vice versa.
Furthermore, both variables may be determined by a third variable, not mentioned in our
schema.
Second, some behavioural relations may not operate simultaneously, but with a time lag.
Suppose that the rapid rise of the profit share in the first half of expansion lowers e
propensity to consume, but with a time-lagged effect, so it limits consumer demand in e
last half of expansion. This may be the case, as shown by the decline in capacity utilisation
before the peak, which is one of the factors limiting the profit rate. So the profit rate may be
mostly affected by factors operating in a previous period.
Third, each cycle is different, so the average may hide important differences. Thus, as
shown in Table 5, the profit rate leads, or turns down before, the cycle peak by about seven
quarters on the average of the six expansions. The average is meaningless because it varies
from a three-quarter to a 15-quarter lead. What is important is that the profit share follows
the same pattern, turning down exactly the same quarter as the profit rate in four cycles and
earlier in two. This does reinforce the importance of the profit share as an explanatory factor
of the decline before the peak.

190

R. Hahnel and H. Sherman

Table 5. Timing of profit rate and its components, 1949-1980. Leads () and lags (+) by quarter
from cycle peak

Expansion
periods

Profit
rate

Profit
share

Capacity
utilisation

Potential
output to
capital ratio

1949.4-1953.3
1954.3-1957.3
1958.2-1960.2
1961.1-1969.4
1970.4-1973.4
1975.1-1980.1

- 7
- 9
- 5
-15
- 3
- 5

-12
-15
- 3
-15
- 3
- 5

-1
-7
-4
-6
-1
-4

- 7
-14
- 8
-35
-11
-20

Average

-7-3

-8-8

-3-8

-15 8

Sources: see Appendix for sources and definitions.

The capacity utilisation ratio turns down later than the profit rate, averaging only a fourquarter lead before the peak. This reinforces the point that it is the weaker explanatory
factor before the peak, though it does contribute something to the decline before each peak
(the lead varies from seven quarters to one quarter). The timing of the potential output to
capital ratio shows that it is of little importance in explaining the cyclical behaviour of the
profit rate. Although its lead varies from seven to 35 quarters, it always moves contrary to
both business activity and profit rates in most of the cycle.
Finally, the quality of the data is not very good for any of these measures, as shown in the
next three sections. These sections discuss the theoretical explanation and the data limitations
for each of the three components of the profit rate.
The profit share
Wages (W) plus profits (P) equal national income (Y), so the profit share (P/Y) equals one
minus the wage share (P/ Y= l W/Y). If both the numerator and denominator of the
wage share (W/ Y) are divided by the number of hours of labour (L) expended in the entire
economy, an interesting set of relationships may be seen:
,
W/L
hourly wage
,,.
wage share = .... =
, . r
(3)
3
5
v
Y/L
product per labour hour
'
The top part of this ratio is now the real hourly wage {W/L). The bottom part is the
productivity of labour per hour (Y/L). So the income share of workers is equal to the real
hourly wage divided by the productivity of labour.
What are the causes of changes in the wage share (or changes in the profit share) over the
business cycle? Three partially conflicting hypotheses are: (1) the reserve army thesis, (2) the
wage lag thesis (mostly supported by under underconsumptionists), and (3) the overhead
labour thesis.
The reserve army thesis (propounded by Boddy and Crotty, 1975) says that the reserve
army of unemployed workers declines in expansion and rises in contraction. When there are
more unemployed, workers are less militant and have less bargaining power to raise wages
(or to lower productivity). Therefore, the bargaining power of labour and, consequently, the
wage share, rises in the last segment of expansion and falls in the last segment of contraction.

Profit rate over the business cycle

191

The wage lag thesis (propounded by many underconsumptionists, such as Sweezy, 1958)
says that productivity and prices rise rapidly in expansion, whereas wages are held to a
much slower rise by institutional constraints and by capitalist power. Therefore, in expansion
workers are always playing catchup, and so have a falling wage share (in spite of frequent
strikes). In contraction, on the contrary, they are able to fight successfully (with some public
support) to prevent drastic real wage cuts, and so have a rising wage share.
The overhead labour thesis (discussed in Weisskopf, 1979) says that in contraction
capitalists are forced to keep most overhead workers (such as bookkeepers, clerical workers,
maintenance workers, security people) even when production declines. For this reason, there
is lower apparent labour productivity, so the wage share is raised. In expansion, capitalists
move toward fuller use of their overhead employees, so productivity rises and the wage share
declines.
In an earlier article (Sherman and Hahnel, 1982), we found at the real hourly wage
moves very slowly up in the average expansion and very slowly down in the average contraction (with a wide variation). The wage share moves mostly opposite to the real hourly
wage. The reason is the much stronger effect of productivitywhich rises more rapidly in
expansion (till near the peak) and falls more rapidly in contraction. Productivity, rather than
the hourly wage, is the main factor affecting the wage share.
Our findings agree with those of Weisskopf (1979) that productivity is determined both by
unemployment and by capacity utilisation at different points in the cyclein the context of
class conflict between labour and capital. In early expansion, productivity rises rapidly
because of (1) better use of employed overhead workers, (2) better use of existing capacity,
(3) workers are not very militant, and (4) some new machinery is being introduced. In late
expansion (1) there is rising employment, rising labour militancy and increased labour
bargaining power, which holds down the rate of productivity growth; while (2) capitalists are
over-optimistic, increasing capacity more than demand, thereby lowering capacity utilisation
and increasing overhead labour per unit, which lowers productivity. In the contraction,
capitalists must continue to pay most overhead workers in spite of production declines, so
average product per employed worker falls.
Our empirical data on the profit share reflect the ratio of all non-labour income (profit,
rent, and interest) to national income. The profit share is understated because (a) there is a
strong incentive to deceive the Internal Revenue Service, with many legal ways of understating property income, and (b) the profit share does not include managerial income, which
is counted as wage and salary income.
Much poorer quality data, however, are the data on labour productivity. The concept
itself is ambiguous in some sectors. How is the 'productivity' of a lawyer or nurse defined?
Even in manufacturing, if more safety regulations are imposed, physical product per dollar of
cost may decline. But shouldn't the reduction in worker deaths be counted as an increased
benefit or 'product'? Alternative definitions do very strongly change the long-run
trendsbut that is beyond the scope of this article. Fortunately, when we tested some alternative definitions (Hahnel and Sherman, 1982), we found that for all of our alternative
definitions of productivity the resulting cyclical patterns were the same.

Capacity utilisation
Potential output, (Z), reflects the potential ability for production if there is full use of the
existing capacity of the means of production owned by all capitalists. The potential full

192

R. Hahnel and H. Sherman

capacity output depends in the long run on the growth of capital, improvements in technology, expansion or improvement in the education and Training of the labour force, and the
knowledge of existing supplies of natural resources. In the short run of the business cycle,
increase of potential output mainly results from a certain amount of new investment in the
expansion phase, embodying to some extent new technological innovations. In the contraction, potential outut is held back, partly by lower expenditures for research and development, but mostly by reductions in new net investment. In the 1949 to 1980 period, potential
output grew moderately and steadily in most expansions, but continued to grow very slowly
in contractions.
Capacity utilisation grows rapidly in early expansion, then slows down or falls in late
expansion, falls in early contraction, and slows down or rises again in late contraction. Since
potential output has gradually risen in most of the 1949 to 1980 period (though at different
rates), it follows that most of the movement in capacity utilisation must be explained by the
much stronger movements of the numerator, which is actual output
Actual output, when it is less than full capacity output, must reflect the limitations of
demand for consumer and producer goods. It reflects the wage share of income, which is
mostly spent for consumer demand. It also reflects the profit rate and total profits, which
stimulate demand for producer goods. There is also government demand and net foreign
demand. It is mainly as a reflection of these movements in demand that capacity utilisation
rises in business expansions and declines in business contractions.
To represent the ratio of capacity utilisation, we used the index issued by the Federal
Reserve Board (FRB) for the manufacturing sector. There are other indexes, with mostly the
same cyclical behaviour, but some differences at times. All of them have considerable weaknesses. The FRB does not try to measure potential full-capacity output, but merely asks
manufacturers how much of their capacity they are using. The answers will be distorted in
'many ways, depending in part on how each capitalist defines capacity. The index is also
generally over-stated because it ignores factories that are completely idle.

The potential output-capital ratio

The third term in the profit rate equation (equation 2) is the ratio of potential full-capacity
output to the capital stock (Z/K). This is the productivity of capital, so it is mainly
determined by technology in the long run (though the direction of technology is also
determined by capitalist relations). Long-run technological changes, however, cannot explain
its apparently rapid short-run movements (1) falling in most of the expansion phase of the
cycle (beginning at or soon after the beginning of expansion), and (2) rising in most of the
contraction phase (beginning at or soon after the beginning of contraction).
There are many possible explanations of these short-run, cyclical movements, found both
in our data and in e data used by Weisskopf (1979). The proposed explanations include
changes in output prices to raw material prices, diminishing marginal returns a la neoclassical
economics, bottlenecks near the peak, and entry of small inefficient firms in the expansions.
It is still hard to believe that this long-run ratio, which is technologically determined, could
have such large cyclical swings. It is far more likely, therefore, that its movements represent
all kinds of residual errors in our data.
Remember that empirically the ratio of potential full-capacity output to capital represents
the ratio of two very dubious measurements. There is no good index of US potential output
published quarterly. We derived potential output by dividing national income by capacity

Profit rate over the business cycle

193

utilisation. That is a very poor estimate for many reasons, including the fact that it is
dominated by swings in the capacity utilisation index, which is itself very suspect
Finally, the denominator of the ratio is 'capital', taken from US Labor Department
estimates to 1974 and our own estimates based on net investment since then. There are a
large number of technical problems with these empirical estimates, especially trying to get
constant dollar estimates in periods of high inflation. In addition, a much worse problem is the
theoretical definition of capital, as debated at great length in the so-called 'capital
controversy'. The result of dividing an uncertain numerator by an uncertain denominator
leads us to mistrust anyone's data, including our own, concerning the ratio of potential fullcapacity output to capital. We included it earlier for what it is worth, but we do not include it
in our summary and conclusions.

Movements of the rate of profit

In summary, let us see how the profit rate is determined in each phase of the cycle. In the
early expansion, the profit rate rises rapidly, partly because (1) the profit share is rising
(since hourly wages change little, while productivity rapidly increases); but mainly because
(2) the utilisation of capacity is rapidly rising (due to rising demand for output). These
factors ensure a rapid rise in the profit rate, which causes a rapid rise in investment.
In late expansion, the profit rate falls mainly because (1) the profit share is fallingmostly
due to falling or stagnant labour productivity; but also, in part, because (2) the utilisation of
capacity is changing very little and eventually even fallingdue to the previous fall in the
propensity to consume, caused by the previous fall in the wage share.
The rate of profit thus declines before the peak because of rising unit costs due to stagnant
or falling labour productivity and limited demand (reflected in declining or stagnant capacity
utilisation). The combined assault from the cost and demand sides is always fatal to the rate
of profit, whose fall eventually causes less investment, which sets off the recession or
depression.
In the contraction, the rate of profit falls mainly because of falling capacity utilisation. All
of the tendencies of the expansion are reversed, till the late contraction sets the stage for
recovery.

Bibliography
Boddy, R. and Crony, J. 1975. Class conflicts and macropolicy, Review of Radical Political Economics,
vol. 7, Spring
Gordon, David 1981. Capital-labor conflict and the productivity slowdown, American Economic
Review, vol. 71, May
Hahnel, Robin and Sherman, Howard 1982. Income distribution and the business cycle, Journal of
Economic Issues, March
Mitchell, W. C. 1951. What Happens During Business Cycles, New York, National Bureau of Economic
Research
Weisskopf, Thomas 1979. Marxian crisis theory and the rate of profit in the postwar US economy,
Cambridge Journal of Economics, vol. 3, December

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R. Hahnel and H. Sherman

Appendix
Sources and definitions
National Income is taken from US Department of Commerce, National Income and Product
Accounts, 1929-1974 (Washington, DC: US Government Printing Office, 1977), plus US Department of Commerce, Survey of Current Business, issues from 1975 to 1980. Wages equal national
income times compensation of employees as a percentage of national income (W/ Y). This ratio
(W/ Y) was obtained from US Department of Commerce, Business Conditions Digest, September
1979 and September 1980. Profit equals national income minus wages. Capital is total durable
producers equipment plus total non-residential structures, interpolated quarterly from annual data of
1947 to 1974, from US Department of Labor, Capital Stock Estimates for Input-Output Industries,
Bulletin 2034 (Washington, DC: US Government Printing Office, 1979). Capital from 1975 to 1980
is the cumulative amount of net investment. Net investment equals the non-residential gross private
domestic investment (from Business Conditions Digest, September 1979 and September 1980) minus
non-residential depreciation (from National Income and Product Accounts, 1929-1974 and from
Survey of Current Business from 1975 to 1980 inclusive). Capacity utilisation is the manufacturing
index of the Federal Reserve Board, reported in Business Conditions Digest (September 1979 and
September 1980). Potential output (Z) equal national income (Y) divided by capacity utilisation
(Y/Z). All data are quarterly, and are in constant 1972 dollars.