The ratio of the average cash inflow to the amount of invested funds. The average rate of return is equal to the rate of return on equal-sized capitals, which is formed in conditions of free competition.
Explanation:
The average rate of return definition is an economic characteristic, which is the percentage of profit for a certain period of time or period to the capital advanced before the beginning of this period. As a rule, this duration of a particular period is taken equal to a year. The value of the average rate of return formula depends on a number of critical factors. These inclusively depend on the rate of surplus value, the organic structure of capital and the time of capital turnover. Intersectoral competition leads to the establishment of an average rate of return on equal amounts of capital allocated to various sectors of the national economy.
The growth of the organic structure of capital, objectively inevitable in modern conditions, determines the tendency of the rate of profit to decrease. Since the development of individual enterprises and industries occurs unevenly under capitalism, as a result of this, the level of technical development at different enterprises and industries is not the same, which leads to a different organic structure of capital. Under these conditions, unequal profits will be obtained for the sale of goods with equal capital. Where the organic structure of capital is lower, more profit will be generated by equal-sized capital, and less in industries with a higher organic structure of capital. Accordingly, profit margins will initially be different, that is, in industries with a low organic capital structure, the profit margin will be higher, and with a high lower.