What is interest?

We explain what interest is and how economic interest developed in history. In addition, what interest rates consist of.

  1. What is interest?

The concept of interest originates in Latin interests , and works to express what makes people care about something . The first meaning of the term is then linked to psychology and emotionality, which understands that interests is a feeling that makes one attend an event or a process.

Psychoanalysis believes that interests is in itself a selfish (self) interest, as opposed to altruism, which is interests in the other. The word is related to the idea of motivation , which means cause of movement . In areas such as school or work, this issue of interests is very much analyzed, and the motivations that arouse people’s interests are considered varied : the acceptance of the other, the need to feed , the cultural honor, idealism , independence, physical activity, power , romance, saving , social position or revenge.

Detached from the first, there is a pejorative meaning of the term. When a person performs an apparent act in good faith, as stated before, he is surely doing so for some interests. However, when it is said that he explicitly “did it out of interests “, it is being implied that the reason that motivated him was not something spiritual and humanitarian (such as solidarity , love, friendship ), but something to get a profit concrete, immediate or mediate (material goods, money, return of favors).

  1. Interest in economics

Adam Smith
Adam Smith believed that money, as merchandise, was subject to supply and demand.

In economics , interest is a magnitude, usually exposed as a percentage (commonly referred to as a “rate”) that a borrower pays for the use of money he borrows from a lender. In the best known case (credit), the interests will be the percentage of money that the lender would obtain as a benefit for the temporary use of his asset for a certain amount of time (usually one year).

The question of economic interests has a very distant origin:

  • In the middle Ages. For example, the Church considered interest as a sin of usury, based on charging a moratorium for the time that elapsed when time was the sole property of God.
  • In the Renaissance. The idea of ​​leasing money arises like any other good, since the cost of the passage of time began to be understood as an ‘ opportunity cost ‘.
  • In the modern era. classical economics introduced the first studies about the interests rate. Adam Smith was the first exponent of the school who believed that money, as merchandise, was subject to supply and demand , which, at the point of equilibrium, would agree on an interests rate.
  1. Interest rates

interest rate
In compound interest, interest is periodically added to the initial capital.

The most interesting discussion at present regarding the interest rate is the one that understands it as a resource of the States to influence the economy : the Central Banks of the countries establish an interests rate, with which they will give loans to others banks . This rate responds to the macroeconomic policy of a country, understanding that a high rate encourages savings and a low rate encourages consumption . Other factors, such as inflation, production and unemployment, also influence.

The interests rate can be classified according to different criteria:

  • The simple interest is the one that is obtained when the interests that are produced do so from the initial capital .
  • The compound interests is the one that is obtained when the interests produced are periodically added to the initial capital, so they reproduce their profit .

On the other hand, the nominal interest is the percentage agreed between the creditor and the borrower of a loan , which the second must add to the capital. The real interestss is the one that subtracts the nominal inflation rate from the nominal, so it measures the purchasing power of income with respect to interest.

As long as the nominal interests will always be positive , the real interestss can be a negative interest, which brings a negative return to the investor , which can lead to negative consequences for the economy.

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