Released September 22, 2009
RALEIGH, N.C. -- People are always amazed at big numbers, so when profits of large corporations are released and publicized, many folks can't believe the millions and often billions of dollars that are made in profits.
Is there another perhaps better way to look at them?
Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"Well, what economists would argue is to not get caught up in what we would call the fallacy of large numbers. When you're looking at anything that's big, whether it be a large corporation or the federal government or some worldwide organization, you're always going to have big numbers. You're going to have big revenue, you're going to have big expenses, and you're going to have big profits.
So what economists argue is better to do - and I think this makes logical sense - is when you're focusing on something like profit, which, of course, is what remains to a business after they pay their expenses, is don't look at the raw number, but the better way to judge is to say, what is the profit rate as a percent of the revenue? How many pennies per dollar revenue actually goes to profits?
And when you do this - and indeed, I just checked the numbers for the latest calculations on this by different economic sectors - when you do this, profit rates for most businesses are very modest, about 3 to 5 percent. That means that for every dollar that a business takes in, they're expenses are going to be 95 cents up to 97 cents, leaving 3 to 5 percent or 3 to 5 cents after for profits.
What happens to profits?
They're either going to be paid out to owners - which doesn't necessarily mean the CEOs - to the shareholders or stockholders, or they can be reinvested in the company."
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http://www.ncsu.edu/project/calscommblogs/news/archives/2009/09/economic_perspe_453.html
