Historical Cost vs. Market Value
The rate of profit depends on the definition of capital invested. Two measurements of the value of capital exist: capital at historical cost and capital at market value. Historical cost is the original cost of an asset at the time of purchase or payment. Market value is the re-sale value, replacement value, or value in present or alternative use.
To compute the rate of profit, replacement cost of capital assets must be used to define the capital cost. Assets such as machinery cannot be replaced at their historical cost but must be purchased at the current market value. When inflation occurs, historical cost would not take account of rising prices of equipment. The rate of profit would be overestimated using lower historical cost for computing the value of capital invested.
On the other side, due to technical progress, products tend to become cheaper. This in itself should raise rates of profit, because replacement cost declines.
Read more about this topic: Rate Of Profit
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