Why is it that the reward for capital is interest? I don't get how the business is rewarded interest, isn't it the banks?
coz capital is funded by banks and the banks received interest payments from the enterprises that borrowed from them, that is how 'capital generates interest'
profit is the reward for enterprise and the enterprise pay part of it as interest payment to the banks where the capital is from
but you guys didn't really says why is the reward for capital is interest"-"
too ez.
The reward for capital being interest is a fundamental concept in economics. To understand why capital is rewarded with interest, we need to recognize that capital refers to the financial resources used in the production process, including investments made by individuals or businesses.
The interest earned on capital is not exclusively received by banks. In fact, interest is a remuneration for the use of capital, regardless of who is providing it. Here's a brief explanation of why this is the case:
1. Time value of money: Money has a time value because it can be used to generate more wealth over time. By investing capital, individuals or businesses can put their money to work and potentially earn additional income. This additional income compensates for the opportunity cost of not using the capital for alternative purposes.
2. Risk and uncertainty: Investing capital involves risk, as there is no guarantee of returns. Therefore, the interest earned on capital also serves as compensation for bearing this risk. The higher the risk associated with an investment, the higher the expected return should be to attract investors.
3. Supply and demand of capital: Interest rates are influenced by the supply and demand for capital. When the demand for capital is high (i.e., when businesses are looking to invest in productive projects), the interest rates tend to increase. This occurs because lenders have more leverage to set higher interest rates when there is a greater demand for borrowing.
4. Intermediation by banks: While banks do play a crucial role in the financial system by channeling funds from savers to borrowers, they are not the exclusive recipients of interest. Individuals, businesses, and other financial institutions also participate in lending and borrowing activities, thus earning or paying interest.
In summary, the reward for capital being interest is a way to compensate individuals or businesses for the use of their financial resources, which involves the time value of money, risk, supply and demand dynamics, and the intermediary role played by various actors in the financial system.
Make sure you know the concise meaning of reward in economy. Reward means your benefit, to speak briefly. Personally, I'd rate your idea as correct because of the possibility to regard the problem from two perspectives: 1.) Business opens up an account for savings 2.) Business is offered credits by banks. It does depend on the point of view to elaborate on.
When granting credits to enterprises, banks will want to have s.th. in return. This is called interest as well. Inflation might also be a trigger for an increasing interest rate, however, it is surely not the main attractor for banks. Banks themselves constitute enterprises as well, interested in making profit.
dongo is right, but I thought I would add this to it:
1)Banks don't get interest; they give it to businesses and the general public because the infaltion rate exists. Banks can only get the interest payments that businesses make after they get loans.
Besides that interest, businesses get more than they put in with their capital, meaning that they gain a different kind of interest. They don't necessarily put this in banks.