The document discusses the concept of interest as the fee paid for borrowing money, distinguishing between gross and net interest. It outlines various theories of interest rates, including productivity theory and liquidity preference theory, and examines the role of interest in both capitalist and socialist societies, emphasizing its importance in resource allocation and investment priorities. Ultimately, it notes that the rate of interest plays a critical role in adjusting demand to the available supply, influencing which projects receive funding based on their expected returns.

1. TOPIC: INTEREST
Output of today's topic-
 What is interest?
 Gross and net interest
 Theories of interest
 How rate of interest is determined
 Modern theory of interest
 Can the rate of interest fall to zero?
 Social importance of interest.

2. WHAT IS INTEREST
Interest is the price paid for using someone
else’s money. It is thus the fee for the privilege
of borrowing money. The fee represents the
price a person pays for the ability to spend /
consume in the present instead of having to
wait for the future to do so. You pay for the
opportunity to use money today that would
otherwise take time to accumulate

3. Gross interest
The total amount which the debtor pays
To the creditor is known as gross interest.
Net interest
All that the borrower pays to the lender is not
Pure or net interest. The price is paid for the services
Of capital only.

4. THEORIES OF INTEREST
HOW THE RATE OF INTEREST
IS DETERMINED?

5. Productivity Theory
Abstinence or Waiting
Theory
Austrian or Agio Theory

6. Fisher’s Time Preference Theory
Liquidity Preference Theory

7. MODERN THEORY OF INTEREST
(HICKS-HANSEN SYNTHESIS)

8. CAN THE RATE OF
INTEREST FALL TO
ZERO?

9. SOCIAL
IMPORTANCE OF
INTEREST

10. Every society, socialist or
capitalist, is faced with the
problem of using its scarce
resources in an optimum manner.
Capital resources are scarce
everywhere even in socialist
society. Its allocate function.
In all types of societies, therefore,
all projects have to go through a
screening process to find their
place in the order of priorities.

11. Even in a socialist society interest cannot be
abolished, though it may not be paid to private
individuals. Even there , through its instrumentality,
priorities regarding the use of scarce capital
resources for various possible employments will be
determined. The order of priorities in a socialist
society will probably be different from the one in a
capitalist society, but the rate of interest will perform
its function all the same. It has the same function as
the function of price, it adjusts demand to the supply
available.

12. It enables capital to be apportioned between
competing demands of alternative uses. It is
through the rate of interest that those uses
which promise the highest future returns
receive the first consideration. Of course, the
criterion of the highest future returns will
differ in a capitalist society from that in a
socialist society. In the former, expectations of
profits for private entrepreneurs and in the
latter the conception of welfare of the
planning authority, will determine the
priorities in investment.