Replacement versus Historical Cost Profit Rates: What is the Difference? When Does it Matter?

This paper explains the B ureau of E conomic A nalysis methodology for computing historical cost and replacement cost measures of the net stock of capital in the US economy. It is demonstrated that there exists a threshold rate of inflation in the price of capital goods that keeps the percentage difference between the two capital stock measures constant. Hence, over periods when average inflation in the price index for capital goods is equal to the threshold value, historical cost and replacement cost profit rates would show equal percentage changes; an example of such a period for the US economy is 1946–2010.