Before we can formulate our fundamental equations, we must first make precise our use of certain terms.

INCOME, PROFITS, SAVINGS AND INVESTMENT

(1) Income. We propose to mean identically the same thing by the three expressions:

(1) the community's money income; (2)the earnings of the factors of production; and (3)the cost of production; and we reserve the term profits for the difference between the cost of production of the current output and its actual sale proceeds, so that profits are not part of the community's income as thus defined.

More particularly we include in income:

1. (a) Salaries and wages paid to employees, including any payments made to unemployed or partially employed or pensioned employees-these being in the long run a charge on industry just as much as other outgoings to remunerate the factors of production.

2. (b) The normal remuneration of entrepreneurs.

3. (c) Interest on capital (including interest from foreign investments).

4. (d) Regular monopoly gains, rents and the like.

The entrepreneurs being themselves amongst the factors of production, their normal remuneration—the definition of which for the present purpose will be given in (2) below—is included in income, and, therefore, in the costs of production, under heading (b). But we exclude their windfall profits or losses represented by the difference (positive or negative) between the earnings, thus defined, of the factors of production and the actual sale proceeds.