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A TREATISE ON MONEY

UK. Ill

tion (or Deflation) respectively. Thus (referring backto the definitions of Qi and Q 2 ) Commodity Inflationmeasures the change in price of liquid consumption-goods, and Capital Inflation the change in the priceof capital-goods, relatively to their cost of production.In what ensues, however, we shall be mainly con-cerned with Income Inflation and Profit Inflation, andwe shall seldom require to split up the latter into itscomponent parts of Commodity Inflation and CapitalInflation.

It follows that changes in n, the price-level ofoutput as a whole, are measured by the sum ofthe Income Inflation and the Profit Inflation; whilstthose in P, the purchasing power of money, aremeasured by the sum of the Income Inflation and theCommodity Inflation. It will be noticed that CapitalInflation or Deflation does not as such affect the pur-chasing power of money, since I', the cost of invest-ment, is unaffected by it. The significance of CapitalInflation or Deflation in its influence on the purchas-ing power of money lies in the fact that its presenceis almost certain, sooner or later, to affect the outputof capital-goods, and hence to produce CommodityInflation or Deflation.

(iv.) The Causal Direction oe Change

It is important for the reader to appreciate thatthe definition of Profits given above, and the divisionof the total value of the product between what wecall Income or Earnings and what we call Profits, arenot arbitrary. The essential characteristic of theentity which we call Profits is that its having a zerovalue is the usual condition in the actual economicworld of to-day for the equilibrium of the purchasingpower of money. It is the introduction of this factfrom the real world which gives significance to theparticular Fundamental Equations which we have