Income

Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.[1][2][3]

This article is about theoretical attempts to define income. For its definition in United States law, see Income (United States legal definitions).

For households and individuals, "income is the sum of all the wages, salaries, profits, interest payments, rents, and other forms of earnings received in a given period of time."[4] (also known as gross income). Net income is defined as the gross income minus taxes and other deductions (e.g., mandatory pension contributions), and is usually the basis to calculate how much income tax is owed.

In the field of public economics, the concept may comprise the accumulation of both monetary and non-monetary consumption ability, with the former (monetary) being used as a proxy for total income.

For a firm, gross income can be defined as sum of all revenue minus the cost of goods sold. Net income nets out expenses: net income equals revenue minus cost of goods sold, expenses, depreciation, interest, and taxes.[3]

Economic definitions

In economics, "factor income" is the return accruing for a person, or a nation, derived from the "factors of production": rental income, wages generated by labor, the interest created by capital, and profits from entrepreneurial ventures.[5]

In consumer theory 'income' is another name for the "budget constraint," an amount ${\displaystyle Y}$ to be spent on different goods x and y in quantities ${\displaystyle x}$ and ${\displaystyle y}$ at prices ${\displaystyle P_{x}}$ and ${\displaystyle P_{y}}$. The basic equation for this is

${\displaystyle Y=P_{x}\cdot x+P_{y}\cdot y}$

This equation implies two things. First buying one more unit of good x implies buying ${\displaystyle {\frac {P_{x}}{P_{y}}}}$ less units of good y. So, ${\displaystyle {\frac {P_{x}}{P_{y}}}}$ 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 ${\displaystyle Y}$ and fixed ${\displaystyle P_{y},}$ then its relative price falls. The usual hypothesis, the law of demand, is that the quantity demanded of x would increase at the lower price. The analysis can be generalized to more than two goods.

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.

Full and Haig–Simons income

Main article: Haig–Simons income

"Full income" refers to the accumulation of both the monetary and the non-monetary consumption-ability of any given entity, such as a person or a household. According to what the 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.[3] As such, however, it is criticized for being unreliable, i.e. failing to accurately reflect affluence (and thus the 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.

Income growth

Income per capita has been increasing steadily in most countries.[6] Many factors contribute to people having a higher income, including education,[7] globalisation and favorable political circumstances such as economic freedom and peace. Increases in income also tend to lead to people choosing to work fewer hours. Developed countries (defined as countries with a "developed economy") have higher incomes as opposed to developing countries tending to have lower incomes.

Income inequality

Income inequality is the extent to which income is distributed in an uneven manner. It can be measured by various methods, including the Lorenz curve and the Gini coefficient. Many economists argue that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice.[3]

National income, measured by statistics such as 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

Throughout history, many have written about the impact of income on morality 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 the individual and the 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.

Accountancy

The International Accounting Standards Board (IASB) uses the following 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).

According to John Hicks' definitions, income "is the maximum amount which can be spent during a period if there is to be an expectation of maintaining intact, the capital value of prospective receipts (in money terms)”.[8]

History

John Hicks used "I" for income, but Keynes wrote to him in 1937, "after trying both, I believe it is easier to use Y for income and I for investment." Some consider Y as an alternative letter for the phonem I in languages like Spanish,[9] although Y as the "Greek I" was actually pronounced like the modern German ü or the phonetic /y/.

See also

• Basic income
• Comprehensive income
• Income tax
• Unpaid work

References

1. Smith's financial dictionary. Smith, Howard Irving. 1908. Income is defined as, "Revenue; the amount of money coming to a person or a corporation (usually interpreted as meaning annually) whether as payment for services or as interest or other profit from investment."
2. Webster's new modern English dictionary, illustrated. Webster, Noah. 1922. Income is defined as "the gain which proceeds from labor, business, property or capital; annual receipts of a person or corporation."
3. Barr, N. (2004). Problems and definition of measurement. In Economics of the welfare state. New York: Oxford University Press. pp. 121–124
4. Case, K. & Fair, R. (2007). Principles of Economics. Upper Saddle River, NJ: Pearson Education. p. 54.
5. Staff (2012). "factor income". BusinessDictionary.com. WebFinance, Inc. Retrieved 20 June 2012.
6. "Gapminder World". Gapminder Foundation.
7. "Gapminder World". Gapminder Foundation.
8. "Oxbridge Notes". Retrieved 18 August 2016.
9. "Why Y?". Greg Mankiw's Blog. December 21, 2016.

• D. Usher (1987). "real income," The New Palgrave: A Dictionary of Economics, v. 4, pp. 104–5