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Income, refers to consumption 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.
The International Accounting Standards Board 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)
Meaning in economics and use in economic theory
In consumer theory 'income' is another name for the "budget constraint," an amount Y to be spent on different goods x and y in quantities x and y at prices Px and Py. The basic equation for this is
- Y = Px • x + Py • y.
This equation implies two things. First buying one more unit of good x implies buying Px/Py less units of good y. So, Px/Py 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 Y, 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.
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 curve 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.
Income in Philosophy and Ethics
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[How to reference and link to summary or text], and has more recently been developed in depth by Harvard economist Benjamin Friedman in his well-acclaimed recent book The Moral Consequences of Economic Growth[How to reference and link to summary or text].
Full and Haig-Simons income
- Main article: 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 Barr 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.
- Economic security
- Financial strain
- Job security
- Income disparity
- Income inequality metrics
- Income level
- Socioeconomic status
- ↑ 1.0 1.1 1.2 1.3 1.4 Barr, N. (2004). Problems and definition of measurement. In Economics of the welfare state. New York: Oxford University Press. pp. 121-124
- ↑ Case, K. & Fair, R. (2007). Principles of Economics. Upper Saddle River, NJ: Pearson Education. p. 54.
- ↑ Schoen, John W.. What's the difference between revenue and income?. msnbc. URL accessed on 2008-03-14.
- D. Usher (1987). "real income," The New Palgrave: A Dictionary of Economics, v. 4, pp. 104–05
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