Discounting future income

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  • #18741

    A question relating to the pricing of producer goods.

    You say that the future revenue stream of a capital good is discounted by the interest rate and that this is economy wide. It seems to me that a producer when valuing a capital good will discount the expected revenue stream using a number of components including the (an) interest rate as well as factors to accommodate for the risks and uncertainties associated with the deployment of that capital good.
    This rate will then vary between different potential entrepreneurs valuing a specific producer good and also for different goods across the economy at a specific point in time.
    Have I missed something?



    You are quite right. Each entrepreneur will form his own anticipation of the revenue stream and the appropriate discount rate, including the particular uncertainty surrounding the line of production he is considering. There are a spectrum of interest rates throughout the economy that depend on different uncertainty associated with each line of production. Each of the interest rates within each maturity class incorporates the relevant pure rate of interest, which is uniform for all production processes in each maturity class regardless of uncertainty associated with each of them.

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