234 NATURE OF CAPITAL AND INCOME [Car XIV
ing from — 15 per cent in the first year to 100 per cent in
the fifteenth year, and then zero forever after.
At this juncture, however, the business reader may feel
disposed to object. He will point out that in our tables the
house is represented as yielding 5.4 per cent the first year
instead of 5 per cent, by neglecting depreciation, and
that, contrariwise, the forest was represented as yielding in
the eleventh year 3.1 per cent instead of 5 per cent, by
neglecting appreciation. For it is true that the house,
worth $18,300 at the beginning of the year, must, under the
given conditions, depreciate $35 during the year; and the
objector will maintain that this ought to be deducted from
the $1000 received from the house, in order to obtain the
true “net earnings.” The deduction leaves $915, which is
just 5 per cent on the capital of $18,300. According to this
calculation, therefore, the house really returns, not 5.4 per
cent, but only 5 per cent. And, applying the same line
of reasoning to the case of the forest, the objector might
insist that the forest increased in value just enough to
make up the difference between the 3.1 per cent, which was
given as the rate of value-return at the beginning of the
second decade, and the 5 per cent to which it would seem
to be entitled.
These calculations are correct. But they do not mili-
tate against the treatment of value-return which has been
given. They merely bring into relief a distinction between
income which is realized by, the investor and income which
is earned by the capital. Realized income is the value of
the actual services secured from the capital; earned in-
come is found by adding to realized income the increase
of capital-value, or deducting from it the decrease. We
may designate them briefly simply as income and earnings.
To illustrate this distinction and to show its importance,
let us consider a four per cent $1000 bond, the interest on
which is payable annually. From what was shown in the
previous chapter it is clear that (if the bond is valued on a
