THE THEORY OF INTEREST

switching over from farming to forestry is, if money canbe borrowed at 4 per cent, more than worth while.

But if the rate of interest were 4% per cent, the com-parison would be different. The present value of the sacri-fices or costs would be $1016, and the present value of thegains or returns $932, showing a preponderance of thesacrifices or costs. That is, if the rate of interest is 4 y 2per cent, the cost from using the land for forestry ratherthan farming outweighs the returns. Therefore, whenmoney is at 4 y 2 per cent, the land would not be used forforestry purposes.

The general principle is, therefore, that among thevarious options open to the capitalist he chooses the mostadvantageous, or more fully expressed, the one which,compared with any other, offers advantages which inpresent value at the given rate of interest outweigh thedisadvantages. But this is evidently merely another for-mulation of the original principle that the use chosenwill be the one which has the maximum present value atthe given rate of interest.

We may summarize the method of comparative advan-tage as follows: We are constantly confronted with theopportunity to choose one income stream rather thananother. We inquire what difference it makes whetherone or the other alternative is chosen. We find often itmakes two kinds of differences, advantages and disad-vantages. If we start with the option which has the moreimmediate advantages and ask whether it is or is notworth while to give up this option and adopt the other in-stead, we may call the proposal so to do an opportunityto invest, i.e., to incur certain disadvantages or, as theywill hereafter be called, costs, for the sake of certain ad-vantages or, as they will hereafter be called, returns.

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