CHAPTER 6

THE DEFINITION OF INCOME, SAVING AND

INVESTMENT

I. Income

During any period of time an entrepreneur will havesold finished output to consumers or to other entre-preneurs for a certain sum which we will designate asA. He will also have spent a certain sum, designatedby A1, on purchasing finished output from other entre-

preneurs. And he will end up with a capital equip-ment, which term includes both his stocks of unfinishedgoods or working capital and his stocks of finished goods,having a value G.

Some part, however, of A+ G- A1 will be attribut-able, not to the activities of the period in question, butto the capital equipment which he had at the beginningof the period. We must, therefore, in order to arriveat what we mean by the income of the current period,deduct from A+ G- A1 a certain sum, to representthat part of its value which has been in some sense)contributed by the equipment inherited from theprevious period. The problem of defining income issolved as soon as we have found a satisfactory methodfor calculating this deduction.

There are two possible principles for calculating it,each of which has a certain significance;—one of them inconnection with production, and the other in connectionwith consumption. Let us consider them in turn.

(i) The actual value G of the capital equipment at

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