gs_-22_--_Interest_and_capital

gs_-22_--_Interest_and_capital - AFTER A FEW MORE LECTURES...

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1 2/16/2010 Econ 11 -- Lecture #22 1 AFTER A FEW MORE LECTURES WE WILL BE SHIFTING TO MACROECONOMICS ( RED BOOK) 2/16/2010 Econ 11 -- Lecture #22 2 LECTURE 22: CAPITAL AND INTEREST INTEREST AND CAPITAL ± WHY INTEREST OCCURS ± PRODUCTIVITY OF CAPITAL ± INTEREST RATE & GROWTH ± INTEREST RATE & PRESENT VALUE ± INTEREST AND CAPITAL o Productivity of capital and interest o Why interest rates are higher in low income countries than in high income countries
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2 2/16/2010 Econ 11 -- Lecture #22 4 WHY INTEREST OCCURS : Impatience vs. abstinence ± Impatience to consume is equivalent to preference of present over future enjoyment. (Impatience leads to borrowing). The cost of impatience is the cost of borrowing (which is interest expense ). ± Abstinence implies willingness to sacrifice consumption. The reward for abstinence is interest income . This is the saver’s reward. 2/16/2010 Econ 11 -- Lecture #22 5 Interest ± Income from the lending of money (financial asset) ± Rental income from lending of machines (capital asset) 2/16/2010 Econ 11 -- Lecture #22 6 INTEREST ± Suppose you lent someone 1,000 pesos and agreed to be paid an income of 100 pesos for one year. o Income = 100 pesos o Principal or Value of loan = 1,000 pesos ± The interest rate is expressed as a percentage: Income Interest rate = 100 Value of Loan ×
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3 2/16/2010 Econ 11 -- Lecture #22 7 ± Suppose you own a machine (a machine is a “capital good”) and you rent it out to a business. The machine costs 1,000,000 pesos. You agreed to be paid 150,000 rental per year. o Value of capital = 1,000,000 pesos o Your income per year = 150,000 pesos INTEREST 150,000 Interest rate or yield = 100 1,000,000 = 15 percent × 2/16/2010 Econ 11 -- Lecture #22 8 The Yield or Return to Capital
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This note was uploaded on 04/18/2010 for the course SE 67256 taught by Professor Dr.gerardosicat during the Spring '10 term at University of the Philippines Diliman.

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gs_-22_--_Interest_and_capital - AFTER A FEW MORE LECTURES...

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