Question

   Discuss and explain which examples the effect of rent, interest, and profits from an economic and time value perspective?

Answer 1

An economy is always influenced by various economic factors. Interest, rent and profits are some of the major economic components that have various influences on an economy. The effects of each of them can be discussed as follows

Economic effects of Rent

· A rent refers to the payments that are received in exchange for the temporary use of a particular good or a property like land or housing.

· The purpose of lending always gives an opportunity to many sections of the society who are poor enough to owe something.

· Renting gives accessibility to goods and properties which are well beyond the scope of many people and thus gives them the chance to build their economy

· It results in power differences where the renter will be always bound by the fear of losing the good as it is owned by someone else. This brings in a sense of economic and social insecurity and thus restricts the renter from taking risks in making economic decisions.

· This process of risk restriction is a disadvantage to the economic potential of the entity and the whole economy would be having a negative effect of this

· The main benefit of a rental system from the economic perspective is that it would make homes more financialised, as it would be considered as a source of income rather than just a place of living

· Renting always brings in additional revenue to the owner as they would continue to generate income even if one of the temporary renter goes. Thus, it offers a steady income and security for the owner, although insecurity concerns are there for the renter.

· Rent increases with progression of time as the base price in an economy would be increased which would result in increased costs for the renter and thus result in a decrease of disposable income for the renter.

Economic effects of Interest

· As the interest rates becomes higher, the cost of borrowings and savings increases

· With increased savings, the disposable income of an individual in an economy reduces and thus limits the growth of consumer spending.

· Higher interests would reduce the inflationary rates and thus could have positive effects on the foreign exchanges in an economy.

· Thus, from the above cases, it can be seen that higher interest rates would result in a moderate growth of an economy.

· As the interest rates becomes lesser, the savings would decrease which would lead to increased spending in the economy

· The deflationary pressures of an economy could be reduced by these decreased interest rates and hence could boost economic growth at times of recession.

· Thus, lesser interest rates would promote spending in the economy and hence could lea to more investments. But as the savings in an economy would reduce, it would have negative effects in economic planning and long tern economic spending patterns.

Economic effect of Profit

· The motive of profit making always makes an economy competitive as all the competing entities of the market would have focus on profits while doing a business.

· Increased profits would benefit the investor and would make the economic condition safer, but the intention of making huge profits would have negative effects in an economy due to unethical competition affecting the buying patterns of the consumer in the market.

· Better profits would result in better incomes and hence would boost investment potential in an economy which could lead to a better economic growth.

· Better profits would mean better efficiency, greater market choice for the consumers and better allocation of resources in accordance with consumer preferences.

                                                 The above facts summarise the various effects of interests, profits and rent in an economy from both economic and time value perspective. Thus, it can be analysed that they would have positive and negative impacts and it is always necessary for an economy to find a balancing approach on its determination so as to sustain the stability of an economy.