What does interest represent in economic terms?

In economic terms, interest represents the payment made for the use of funds to create capital goods. When individuals or businesses borrow money, they typically pay back the principal amount along with interest, which compensates the lender for the opportunity cost of lending that money. This interest reflects the time value of money—suggesting that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

When capital goods are financed through loans, the interest paid by the borrower represents the cost incurred for accessing resources needed for production and investment. This relationship is fundamental in economics as it influences decisions regarding saving, investing, and spending.

The other options do not accurately reflect the concept of interest. Profit from selling goods relates to income earned from business operations rather than the cost of borrowing. Fees charged by banks for account maintenance are service-related charges and not termed as interest. Similarly, the cost of living expenses pertains to everyday costs that individuals incur and do not relate directly to capital financing or borrowing. Thus, the definition provided in the correct answer accurately encapsulates the role of interest in economic activities.