The price for which land will sell; that is, its capital value, is related to rent as effect to cause. Rent is the cause and the value of the land the effect. The value of the land is ascertained by capitalizing the annual rental at the current rate of interest. Thus, if the annual rental of a farm is one thousand dollars and the current rate of interest in the community on investments similar in character to that in the land is 5 per cent, the value of the land is determined by capitalizing the one thousand dollars at 5 per cent. The result is twenty thousand dollars. If the land should become less productive because of loss of fertility, or increased difficulties of transportation of product, so that its rental is only five hundred dollars, and if the current rate of interest in the community on investments of this character remains the same, the value of the land will sink to ten thousand dollars. On the other hand, if the productivity of the land should become greater so that the owner receives yearly two thousand dollars in rent, the capital value of the land will now be forty thousand dollars.

A change in the rate of interest in the community has an effect on the value of the land opposite to that caused by a change in the yearly rental. Thus, if the yearly rental is a thousand dollars and the current rate of interest changes from 5 per cent to 4 per cent, the value of the land increases from twenty thousand dollars to twenty-five thousand dollars. If the current rate of interest increases from 5 per cent to 6 per cent, the capital value of the land drops from twenty thousand dollars to about sixteen thousand six hundred and sixty-six dollars. In this reckoning we assume in each case that the rental or the rate of interest assumed is expected by the buyer and seller to prevail for a long period of time.