Income
Encyclopedia
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time." For firms, income generally refers to net-profit: what remains of revenue
after expenses have been subtracted. In the field of public economics, it may refer to the accumulation of both monetary and non-monetary consumption ability, the former being used as a proxy for total income.
, factor income
is the flow
(that is, measured per unit of time) of revenue accruing to a person or nation from labor services and from ownership of land
and capital
.
In consumer theory
'income' is another name for the "budget constraint," an amount
to be spent on different goods x and y in quantities 
and 
at prices 
and 
. The basic equation for this is
This equation implies two things. First buying one more unit of good x implies buying
less units of good y. So, 
is the relative price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed 
, then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demand
. The generalization to more than two goods consists of modelling y as a composite good
.
The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis
.
describes as the "classical definition of income:" the 1938 Haig-Simons definition, "income may be defined as the... sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights..." Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full income. As such, however, it is criticized for being unreliable, i.e. failing to accurately reflect affluence and that is consumption opportunities of any given agent. It omits the utility a person may derive from non-monetary income and, on a macroeconomic level, fails to accurately chart social welfare. According to Barr, "in practice money income as a proportion of total income varies widely and unsystematically. Non-observability of full-income prevent a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income." On the macro-economic level, national per-capita income, increases with the consumption of activities that produce harm and omits many variables of societal health.
and the Gini coefficient
. Economists generally agree that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice.
National income, measured by statistics such as the Net National Income
(NNI), measures the total income of individuals, corporations, and government in the economy. For more information see measures of national income and output
.
and society
. Saint Paul wrote 'For the love of money is a root of all kinds of evil:' (1 Timothy 6:10 (ASV
)).
Some scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both individual and national level, provide the indispensable foundation for sustaining any kind of morality. This argument was explicitly given by Adam Smith
in his Theory of Moral Sentiments, and has more recently been developed by Harvard economist Benjamin Friedman
in his book The Moral Consequences of Economic Growth.
uses this definition:
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
after expenses have been subtracted. In the field of public economics, it may refer to the accumulation of both monetary and non-monetary consumption ability, the former being used as a proxy for total income.
Economic definitions
In economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, factor income
Factor income
Factor income is income derived from selling the services of factors of production. In the case of labour, this means wages, plus the part of the incomes of the self-employed which is a reward for their own labour. Income from land is rents, including part of the incomes of the self-employed, and...
is the flow
Stock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
(that is, measured per unit of time) of revenue accruing to a person or nation from labor services and from ownership of land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
.
In consumer theory
Consumer theory
Consumer choice is a theory of microeconomics that relates preferences for consumption goods and services to consumption expenditures and ultimately to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relations in...
'income' is another name for the "budget constraint," an amount
to be spent on different goods x and y in quantities and at prices and . The basic equation for this isThis equation implies two things. First buying one more unit of good x implies buying
less units of good y. So, is the relative price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed , then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demandLaw of demand
In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases ....
. The generalization to more than two goods consists of modelling y as a composite good
Composite good
In economics, demand for a good is often the focus as to a change in its price. A composite good is an abstraction used in economics that represents all goods in the relevant budget besides the one in question.-Purpose:...
.
The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis
Permanent income hypothesis
The permanent income hypothesis is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term...
.
Full and Haig-Simons income
Full income refers to the accumulation of both, monetary and non-monetary consumption ability of any given entity, such a person or household. According to the what economist Nicholas BarrNicholas Barr
Nicholar Barr FRSA is a British economist, currently serving as professor of public economics at the London School of Economics . He received his Ph.D. in Economics as a Fulbright Scholar from the University of California, Berkley and his MSc in Economics from LSE...
describes as the "classical definition of income:" the 1938 Haig-Simons definition, "income may be defined as the... sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights..." Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full income. As such, however, it is criticized for being unreliable, i.e. failing to accurately reflect affluence and that is consumption opportunities of any given agent. It omits the utility a person may derive from non-monetary income and, on a macroeconomic level, fails to accurately chart social welfare. According to Barr, "in practice money income as a proportion of total income varies widely and unsystematically. Non-observability of full-income prevent a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income." On the macro-economic level, national per-capita income, increases with the consumption of activities that produce harm and omits many variables of societal health.
Income inequality
Income inequality refers to the extent to which income is distributed in an uneven manner. Within a society can be measured by various methods, including the Lorenz curveLorenz curve
In economics, the Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth; it is a graph showing the proportion of the distribution assumed by the bottom y% of the values...
and the Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
. Economists generally agree that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice.
National income, measured by statistics such as the Net National Income
Net National Income
Net national income is an economics term used in national income accounting. It can be defined as the net national product minus indirect taxes...
(NNI), measures the total income of individuals, corporations, and government in the economy. For more information see measures of national income and output
Measures of national income and output
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income . All are specially concerned with counting the total amount of goods and...
.
Income in philosophy and ethics
Throughout history, many have written about the impact of income on moralityMorality
Morality is the differentiation among intentions, decisions, and actions between those that are good and bad . A moral code is a system of morality and a moral is any one practice or teaching within a moral code...
and society
Society
A society, or a human society, is a group of people related to each other through persistent relations, or a large social grouping sharing the same geographical or virtual territory, subject to the same political authority and dominant cultural expectations...
. Saint Paul wrote 'For the love of money is a root of all kinds of evil:' (1 Timothy 6:10 (ASV
American Standard Version
The Revised Version, Standard American Edition of the Bible, more commonly known as the American Standard Version , is a version of the Bible that was released in 1901...
)).
Some scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both individual and national level, provide the indispensable foundation for sustaining any kind of morality. This argument was explicitly given by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
in his Theory of Moral Sentiments, and has more recently been developed by Harvard economist Benjamin Friedman
Benjamin M. Friedman
Benjamin Morton Friedman, a leading American political economist, is the William Joseph Maier Professor of Political Economy at Harvard University. Friedman is a member of the Council on Foreign Relations, the Brookings Institute's Panel on Economic Activity, and the editorial board of the...
in his book The Moral Consequences of Economic Growth.
Accountancy
The International Accounting Standards BoardInternational Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...
uses this definition:
- "Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants." [F.70] (IFRS Framework)
See also
- Basic incomeBasic incomeA basic income guarantee is a proposed system of social security, that regularly provides each citizen with a sum of money. In contrast to income redistribution between nations themselves, the phrase basic income defines payments to individuals rather than households, groups, or nations, in order...
- Comprehensive incomeComprehensive incomeComprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
- Income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
- Unpaid workersUnpaid workersUnpaid workers are those who work without pay. These may be either members of a family or cooperative; conscripts or forced labour; volunteer workers who work for charity or amusement; students who take intern positions as work experience; or conventional workers who are not paid because their...