Quote from: dinofelis on March 27, 2015, 05:47:05 AM

Quote from: tee-rex on March 26, 2015, 02:35:10 PM

You cannot just correct i for inflation and not correct R_t2 for it at the same time (since you would sell at higher, already inflated prices). In fact, you can't even correct it (W_t1*(1+(t2-t1)*i)) for inflation at all (since your costs are fixed at t1). You buy raw materials at old uninflated prices, and now you suggest we should recalculate their cost at new prices when we sell finished goods (that is i = i0 + p)? That would be an entirely novel idea in accounting. Strictly speaking, you can't even write R_t2 - W_t1*(1+(t2-t1)*i), or that wouldn't be your profit (or benefit, in your speak).

No, you're missing my point.

At t1, if there is an inflation rate p, then interests will be i0 + p, where i0 is "purely economical and independent of inflation" (that is, the market price for "store of value", independent of the currency at hand).

Now, if you buy your stuff at time t1 for a price W_t1, you can consider that you BORROW money at t1 for an amount of W_t1. You will pay back that loan at t2, when you get to sell your product for a price R_t2.

So during the time t2 - t1, you have a loan of magnitude W, on which you will have to pay an interest (t2 - t1) * (i0 + p) * W.

So the extra COST of inflation equals (t2 - t1) * p * W.

It seems that it is you who is missing my point.

First of all, if you do really borrow capital (which is a viable way of financing you working capital), the costs of it, that is interest paid, are already included in W_t1 (yet another entry in total costs). Furthermore, inflation means that the price which you sell your goods at also rises, so your extra cost of inflation will be offset in the revenue. And last but not least, you can indeed write something like R_t2 - W_t1*(1+(t2-t1)*i), but this will be not what you likely wanted to say. What is i here? If it is a rate of inflation in disguise then it will be offset by an increase in R_t2 (since prices grow), so you in fact should write something like R_t1*(1+(t2-t1)*i)) - W_t1*(1+(t2-t1)*i). But the latter shows that your nominal profit increases by the rate of inflation, and remains the same in percentages as before. So, essentially, nothing has changed for the producer. If you add p to i0 it will be as well offset in the resulting R_t2 (by definition).

But that was not my point entirely.