Future Business Leader Achievments (FBLA) Economics Practice Exam

What is the difference between accounting profits and economic profit?

1. There is no difference between accounting profit and economic profit

2. Implicit costs are subtracted from accounting profit to give economic profit

3. Implicit costs are added to accounting profit to give economic profit

4. Implicit costs and nominal profit are subtracted from accounting profit to give economic profit

The correct answer is: Implicit costs and nominal profit are subtracted from accounting profit to give economic profit

The correct choice highlights that implicit costs and nominal profit are considered when calculating economic profit from accounting profit. To clarify, accounting profit is the financial gain that a business makes, calculated by subtracting explicit costs (direct, out-of-pocket expenses) from total revenue. However, economic profit goes further by including both explicit and implicit costs. Implicit costs represent the opportunity costs of utilizing the resources in their current use instead of the next best alternative. By subtracting both implicit costs and nominal profit (the accounting profit derived solely from explicit transactions) from total revenue, one can determine the economic profit, which provides a more comprehensive view of profitability that considers both direct expenses and the opportunity costs of business decisions. This understanding is crucial for evaluating the true profitability of a business, as it considers the broader implications of resource utilization beyond just immediate financial transactions.