CHAPTER XIV

EARNINGS AND INCOME

§1

In the last chapter it was shown that, perfect foresight
being assumed, the value of any capital good is derived from
its future income by discounting the value of that income.
It now remains to compare the capital-value thus derived
with the expected income-value on which it depends.
It is evident at the outset that the capital-value is less
than the total expected income; for the discounted value
of any future sum is necessarily less than that sum itself.
This fact is illustrated in the third and fourth columns of
the following table of capital and income in the cases of
five typical articles: —

 

To CAPITAL- CAPITAL-CAPITAL
 | NET INCOME PER YEAR I ora VALUE (INT. | VALUE (INT.
NCOME AT 5%) AT 23%)

 

|
Land $1000 per year for- |
| Infinite $20,000.00 | $40,000.00

 

 

 

ever
House | $1000 per year for
| 50 years. -. . .| $50,000.00 | 18,300.00 | 28,400.00
Horse $100 per year for
6 years . . 600.00 508.00 551.00
Suit of | $20 1st year; $10 |
clothes { 2d year . . . 30.00 28.00 29.00
Loaf of | $36.50 per year, for
bread day 10 10 10

 

In this table we observe that the value of the land, when
interest is at 5 per cent, is $20,000, whereas the total income

 to be expected from it is infinitely greater; that the
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