ECONOMIC

the profits that companies report are strongly affected by the accountingmethods they use. Most companies rely on the first-in-first-out method. Underthis system, when prices of purchased goods are rising, the prices at whichpurchases are charged to costs will ordinarily be less than the prices of goodsin ending inventories. The effect is to reduce the cost of goods sold and toraise profits. The amount by which profits are inflated under such accountingprocedures is analogous to capital gains resulting from inflation, whichare not included in the calculation of national income. In the nationalaccounts this correction is applied to the valuation of inventory change onthe product side and affects proprietors' income and profits on the incomeside.Although the share of profits plus IVA as a percentage of gross productoriginating in nonfinancial corporations rose for the third year in a row, the1973 share was still lower than in any year from 1947 through 1969 (Table15). Last year's increase in the profit share was matched by a decrease inall costs except employee compensation: indirect business taxes, capital consumptionallowances, and net interest. The last two have shown a strongsecular increase; and, as indicated below, they are partly responsible for thedecrease in the profit share.Over the postwar years depreciation laws and regulations have undergonemany changes—in the direction of liberalization—that have influencedthe level of profits. Holding constant these methods of calculating depreciationwould still leave the 1973 profits share low in comparison to the yearsfrom 1947 to 1969. For example, according to a special analysis of the CommerceDepartment, if one used historical costs for the valuation of assets,service lives of assets equal to 85 percent of the Treasury Department'sBulletin F, and the double declining balance method of depreciation, the1973 ratio of corporate profits to output would be raised by 0.3 percentagepoint, whereas for the 1947-69 period it would be essentially unchanged.A further allowance for interest, a return on capital whose importance hasrisen over the postwar years, would narrow the difference between 1973 andthe 1947-69 average even more but would still leave the 1973 profit ratiolower by 2.7 percentage points. (Estimates for 1973 are those of the Council.)Most companies use historical costs for calculating depreciation, and forthe most part the Commerce Department accepts in the national accountsthe depreciation reported for tax purposes. The current value of outputshould reflect current prices, and costs of production should reflect currentcosts. If depreciation is standardized with replacement rather than historicalcosts, last year's profit share would be reduced by 2.0 percentage points. Interms of depreciation calculated with replacement costs the spread in profitsbetween 1973 and the 1947-69 average is considerably greater than thespread that reflects the use of historical costs.The share accounted for by employee compensation, which as a rule hasmoved countercyclical^, was unchanged from 1972 and was exceeded only72