Full text: Capital Gains in Economic Theory and National Accounting

case more special in that it applies only to assets of a certain type, and yet 
more general in that it holds also in underemployed economies. In both cases the 
shift in distribution is the essential feature. There is nothing strange then, 
after all, in the concept of saving needed to finance not only real investment 
but also the increase in price of assets with inflexible supply. 
The price of the asset is ultimately based on what it yields (dividend for a 
share, rent for land). For anybody, however, who is not determined to hold the 
asset for ever the expected future price will also be important. The full return 
on the asset will therefore consist of two terms 
Return = Yield + appreciation. 
r = y + a. 
In the simplest case if the yield, say the dividend, is constant as a proportion 
of the asset price and the rate of return r is also constant the asset price A 
will be At = R/r = ( yAt + aAt )/r where a = ( At+l/At 
- 1 ) • 
r = y + a. 
The present price depends, therefore, on the future price of the asset. The rate 
of return of the share r will be higher than what you would get from holding a 
bond at fixed interest because of the greater risk involved in the investment. 
What course of events can justify a continuous increase in the price of the 
asset (the share) that is, a positive a ? The answer is: The internal 
accumulation of retained profits in the firm which will make it possible in 
future to pay dividends at a constant rate on an increasing value of the share. 
We may then regard a also as an estimate of the increase in the real earning 
capacity of the firm which, if it happens to be realistic will make it possible 
for the price of the share to rise continuously without the holders being 
ultimately disappointed. 
Now the above considerations are very abstract: They do not tell us what 
happens, how the share prices are formed, they tell us only what would have to 
happen if a smooth development were to result. In reality it is important that 
there are two types of holders of shares: The long term holder is strongly 
interested in the dividend. For him the knowledge of the future dividends would

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