What is a Rate of Profit?

Sometimes known simply as the profit rate, a rate of profit is a measure of the profit earned on a given investment of project. This particular calculation is somewhat similar to the rate of return on investment, in that both approaches help to assess the viability of the effort in terms of what is gained for the amount of resources expended. The concept is found as pat of the Marxist theory regarding political economics.

The most basic means of calculating the rate of profit involves identifying the surplus minus the values associated with the project, then dividing that figure by the amount of capital invested. The type of surplus involved may include factors such as the labor costs associated with a manufacturing process, or the income generated from the rental of some type of property. This in turn is related to the value of the output or value then multiplied by the amount of capital that is invested during the period under consideration. The end result is the rate of profit as of the close of the period under consideration.

It is important to note that in considering the capital invested, both historical cost and market value are assessed. Historical cost has to do with the resources required to make the initial purchase of the asset, whereas the market value focuses on the current resale value of the asset, or what it would cost to replace the asset in today’s market. The type of asset involved is key to determining whether historical cost or market value is a better representation in a given situation. For example, little would be accomplished by basing the capital invested mainly on the original cost of a piece of equipment, such as a tractor in a farming project. The resulting figure would have more meaning if the current market value were used instead.

A number of factors can influence the upward and downward movement of the rate of profit over time. These include changes in technology that make it possible to lower expenses, changes in the wages paid to workers who labor on the production line, or changes in process that are necessary to successfully compete with companies producing similar goods or services. As conditions can change regularly, it is not unusual for the rate of profit to also change from one period to another. For this reason, companies are likely to monitor the factors relevant to the calculation and predict those changes and their positive or negative impact on the profit rate. Doing so makes it somewhat easier to minimize losses while also taking advantage of any emerging trends that would tend to generate a more favorable rate of profit.