Profitability and capital accumulation in Mexico: a first look at tradables and non-tradables based on KLEMS

The article uses the KLEMS database to estimate equations for the rate of private, non-residential capital accumulation in manufacturing, whole tradables, and non-tradables in Mexico during the period 1992-1994. It shows the rate of capital accumulation is positively correlated with the profit rate and its components – the profit share, the output/capital ratio and the relative price of capital goods, negatively correlated in the latter case – in the three sectors, but with considerably larger profitability effects in manufacturing and tradables. It also shows that capital accumulation is positively correlated with the real exchange rate in manufacturing and tradables, and negatively (and less strongly) correlated in non-tradables. A real depreciation increases the relative prices and profit rates of the former sectors, shifting accumulation toward them and away from non-tradables, with a positive overall effect on capital accumulation. The estimations – based on the error-correction ARDL bounds testing approach, and supplemented by OLS equations using the lagged values of the explanatory variables – imply that the flat trajectory of capital accumulation in Mexico is explained in part by a downward trend in the profit rate, which resulted from a fall in the output/capital ratio that more than offset an increase in the profit share.