Reply To: Imputed Interest


I don’t mean to be thick, but I don’t understand why it has to be part of the economic calculation. Maybe I’m missing something. In the scenario you present, it reduces the profit they show. Let us say someone was ignorant about imputed interest, so they didn’t report it. Wouldn’t the same dollar amount make it into the compilation of income because that amount would be reported as profit instead of imputed interest?

I do get the value for Mary & Joe figuring their opportunity cost, so that makes sense to me.

In the lecture, I thought Professor Manish was talking about it in a different manner than your scenario. If I recall correctly, the scenario he presented was if the business owner self-financed instead of taking out a loan and paying interest on that loan. In that case, the imputed interest would increase the business expenses, thereby reducing their net income. In that scenario, it seems it would make a difference to a complication of income because it would reduce what was taken into account for income compilation.