11th grade economics
posted by Jim on .
Since capital are means of production e.g. machinery, how does that relate to the reward being interest? Business owners borrow money and pay interest but how does capital goods reward interest to business owners?
In economics "captial" generally means one of two things. First is physical capital which is, as you state, a means of production e.g., machinery. The second is financial capital e.g., cash. Now then, it is a bit easier to relate financial capital to interest income. However, the same principals apply to both kinds of capital In particular, what is the opportunity cost of financial capital? Say you have a large pile of cash which you want to use for a business. The opportunity cost would be the foregone interest income that you would have received. And if you kept the cash in a bank and earned interest, the opportunity cost of that interest income is the foregone rate of return on investing.
I hope this helps.