This chapter constructs a model of an economy in terms of its productive processes. It presents the Social Accounting Equation, and argues that it should be viewed as a definition of profits. It draws a clear distinction between the ‘ideal’ social accounting system, such as it is natural to use in theory, and the practical system which inevitably stands proxy for it in applied economics. The former is based upon a forward-looking valuation of capital; the latter upon a backward-looking valuation. The former is self-consistent, automatically; the latter is not automatically self-consistent.
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