RENT,PROFIT AND

INTEREST
BY VEENA SANGEETH
BCOM ACCA
 RENT
o Rent is a factor income generated from ownership of land and building.
o Rental income includes rent of lent out properties (Actual rent) and rent
of owner occupied properties (Imputed rent).
Rent as Surplus
o In economics , the term ‘rent’ is being increasingly used in the sense of a
surplus.
o Rent is a surplus. In the sense that , rent is a payment in excess of transfer
earnings.
o Transfer earnings mean the amount of money which any particular unit
could earn in its next best alternative use.
 Type of Rent
There are mainly 5 types of rents:
 Economic Rent
Economic rent is any payment to an owner or factor of production in excess of the
costs needed to bring that factor into production. In economics the term ‘rent’ is used in the
sense of economic rent.
 Gross Rent
Gross rent is the rent which is paid for the service of land and the capital invested in it.
Gross rent consist of :-
i. Economic rent
ii. Interest on capital invested for improvement of land.
iii. Reward for risk taken by the landlord in investing his capital.
 Scarcity Rent
Scarcity rent refers to the price paid for the use of the homogeneous land when
its supply is limited in relation to demand. If all land is homogeneous but demand
for land exceeds its supply, the entire land will earn economic rent by virtue of its
scarcity. In this way, rent will arise when supply of land is inelastic.

 Contract Rent
Contract rent refers to that rent which is agreed upon between the landowner
and the user of the land. On the basis of some contract, which may be verbal or
written, contract rent may be more or less than the economic rent.
 Differential Rent
Differential rent refers to the rent which arises due to the differences in
the fertility of land. In every country, there exists a variety of land. Some
lands are more fertile and some are less fertile. When the farmer’s are
compelled to cultivate less fertile land the owners of more fertile land get
relatively more production. This surplus is called differential rent.
 PROFIT
o Profit is defined as a reward received by an entrepreneur by combining
all the factors of production to serve the need of individuals in the
economy .
o In simple terms, Profit is the factor income generated from
entrepreneurship.
o Lord Keynes remarked that ‘Profit is the engine that drives the business
enterprise’.
o The profit generated by a production unit is divided in three categories:-
o Dividend
o Corporate Tax
o Corporate saving
o Profits perform two important primary roles in such an economy.
First, profits serve as a signal to change the rate of output or for
the firms to enter or leave the industry.
Second, profits play a critical role in providing incentive to introduce
innovations and increase productive efficiency and take risk.
Types of profit

o Accounting Profit
In accounting sense, profit is surplus of revenue over and above all paid-
out costs, including both manufacturing and overhead expenses.
The accounting profit is calculated as :-
Accounting Profit = TR- ( W+R+I+M) or TR - Explicit cost
where TR = total revenue, W = wages and salaries, R = rent, I = interest, and
M = cost of materials.
o Economic Profit
In economics term, Profit is defined as a reward received by an
entrepreneur by combining all the factors of production to serve the need of
individuals in the economy.
• It also takes into account the implicit or imputed costs.
Economic profit is calculated as :
Economic Profit= Total revenue - Total cost(Explicit and
Implicit costs)
 INTEREST
o Interest is a factor income generated from ownership of capital .
o It is defined as the amount to be paid by a production unit for the use of
capital whether borrowed or provided by the owner . So, interest payment
include both actual and imputed interest.
o It is also the factor payment made by the production unit for the capital
borrowed for production purpose.
What are the roles of Interest rate in Economy?

The main role of Interest rate in the economy are as follows :-

i. Interest rate aids the flow of credit in the economy and helps financial
entities such as corporate organization, banks, mutual funds and
insurance companies carry out their intermediation role.
ii. The interest rate is also used as an instrument in economic policy.
Interest rate are changed according to inflation and deflation to maintain
stable economic flow in the economy.
Types of Interest
There are mainly two type of Interest :-
i. Net Interest
ii. Gross Interest
 Net Interest
The payment made exclusively for the use of capital is regarded as net Interest
or pure Interest. According to Prof. Marshall, “Net Interest is the earnings of capital
simply or the reward of waiting simply.”
Net Interest = Gross Interest – (payment for risk + payment for inconvenience
+ cost of administering credit)
 Gross Interest
Gross Interest is the payment made by the borrowers to the lenders .
It is also called Composite Interest.
It includes payments for the loan of capital payment to cover risks for loss
which may be:
(i) A personal risks
(ii) Business risks, payment for inconveniences of the investment.