Study week on the econometric approach to development planning

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Monograph

Identifikator:: 1824422792

URN:: urn:nbn:de:zbw-retromon-217476

Document type:: Monograph

Title:: Study week on the econometric approach to development planning

Place of publication:: Amsterdam [u.a.]

Publisher:: North-Holland Publ. Co. [u.a.]

Year of publication:: 1965

Scope:: XLVII, 1259 S.; graph. Darst.

Digitisation:: 2022

Collection:: Economics Books

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Chapter

Document type:: Monograph

Structure type:: Chapter

Title:: The role of capital in economic development / Maurice Allais, Ecole Nationale Supérieure de Mines Paris - France

Collection:: Economics Books

236 NATURE OF CAPITAL AND INCOME [Crar. XIV $1000 a year for 20 years, discounted at 5 per cent. But it is not true that $18,300 is the discounted value of the earnings of the house, for the earnings are all less than $1000, beginning at $918 a year and dwindling each year until the fifty years have expired; and clearly the dis- counted value of fifty annual items each less than $1000 must be less than the discounted value of fifty annual items of $1000 each. Since, -then, earned income cannot be derived without assuming realized income, and since capital-value has been shown to be the present value of the latter, and not of the former, it is clear that realized income is the more funda- mental concept of the two. §5 But so persistent is the accountant’s instinet to put aside realized income in favor of earnings that we need to point out in detail the confusions which arise, unless income and earnings are carefully distinguished. We first observe that, under the given conditions of foreknowledge, earnings and interest are equal. Now if interest is at 5 per cent, a capi- tal of $1000 invested in whatever form — land, houses, horses, securities, or anything else — though it is said to earn 5 per cent, does not necessarily receive an income each year of $50. The $1000 means the present value, dis- counted at 5 per cent, of some expected income stream; but that income stream may take any one of an indefinite number of forms; such, for instance, as a perpetual annu- ity of $50 a year, as in the case of land; or a terminable annuity of $100 a year for 14 years; or an income of $25 a year for 10 years followed by an income of $167.50 a year for 10 years. All of these are inter-equivalent, and when discounted at 5 per cent, each of them represents a capital of $1000. Of all these possible forms of income it is usual to take the perpetual annuity as the standard income (earnings) and to

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