Productivity Changes and Alternative Income Series: A Simulation.

Abstract The purpose of this article is to explore the effect of productivity change on the divergence between historical cost income and income computed on a current replacement cost basis. Most discussions relating to changes in the established historical cost framework emphasize the impact of rapid inflation on differences between methods. However, simulation results indicate that changes in resource productivity also affect the relative magnitude of differences between methods. In other words, inflation is not the only variable that must be considered by policy makers in deciding whether to retain historical cost as the established accounting basis. The long-term significance of this to policy makers is that a potentially broad range of economic variables, productivity being one example, must be considered in analyzing accounting issues. Inflation is not the sole cause for differences among methods, and the broader economic dimensions underlying accounting policy choices must be recognized. A more immediate policy implication relates to the expected effect on productivity of emerging international cartels, natural raw materials depletion and other related supply-demand factors. Insofar as these factors tend to reduce secular productivity gains (or lead to productivity decreases), one can expect the relative differences among accounting measurement alternatives to widen.