Income is the
consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
and
saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
opportunity gained by an entity within a specified timeframe, which is generally expressed in
monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
terms.
Income is difficult to define conceptually and the definition may be different across fields.
For example, a person's income in an economic sense may be different from their income as defined by law.
An extremely important definition of income is
Haig–Simons income
Haig–Simons income or Schanz–Haig–Simons income is an income measure used by public finance economists to analyze economic well-being which defines income as consumption plus change in net worth. It is represented by the mathematical formul ...
, which defines income as ''Consumption + Change in net worth'' and is widely used in
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
.
For
household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...
s and individuals in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, income is defined by tax law as a sum that includes any
wage
A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...
,
salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
...
,
profit,
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
payment,
rent
Rent may refer to:
Economics
*Renting, an agreement where a payment is made for the temporary use of a good, service or property
*Economic rent, any payment in excess of the cost of production
*Rent-seeking, attempting to increase one's share of e ...
, or other form of earnings received in a calendar year.
[Case, K. & Fair, R. (2007). ''Principles of Economics''. Upper Saddle River, NJ: Pearson Education. p. 54.] Discretionary income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major c ...
is often defined as gross income minus
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es and other deductions (e.g., mandatory
pension
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
contributions), and is widely used as a basis to compare the welfare of taxpayers.
In the field of
public economics
Public economics ''(or economics of the public sector)'' is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve ...
, 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
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
minus the
cost of goods sold
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost ...
.
Net income
In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, a ...
nets out expenses: net income equals revenue minus cost of goods sold,
expenses
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...
,
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
, interest, and taxes.
[
Barr, N. (2004). Problems and definition of measurement. In ''Economics of the welfare state''. New York: Oxford University Press. pp. 121–124
]
Economic definitions
Full and 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
Nicholas Barr FRSA is a British economist, currently serving as professor of public economics at the London School of Economics (LSE). He received his Ph.D. in economics as a Fulbright Scholar from the University of California, Berkeley and his ...
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 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
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
. 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.
Factor income
In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, "
factor income
Factor Income is the flow of income that is derived from the factors of production, i.e., the general inputs required to produce goods and services. Factor Income on the use of land is called rent, income generated from labor is called wages, and i ...
" 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.
In
consumer theory
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
'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
and fixed
then its relative price falls. The usual hypothesis, the
law of demand
In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), ...
, 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
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
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
The permanent income hypothesis (PIH) is a model in the field of economics to explain the formation of consumption patterns. It suggests consumption patterns are formed from future expectations and consumption smoothing. The theory was developed ...
.
Legal definitions
Definitions under the Internal Revenue Code
26 U.S. Code § 61 - Gross income defined. There are also some statutory exclusions from income.
Definition under US Case law
Income is an "undeniable accessions to wealth, clearly realized, and over which the taxpayer has complete dominion." Commentators say that this is a pretty good definition of income.
Taxable income is usually lower than Haig-Simons income.
This is because unrealized appreciation (e.g., the increase in the value of stock over the course of a year) is economic income but not taxable income, and because there are many statutory exclusions from taxable income, including
workman's compensation
Workers' compensation or workers' comp is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her emp ...
,
SSI, gifts, child support, and in-kind government transfers.
Accounting definitions
The
International Accounting Standards Board
The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation.
The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...
(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."
.70(IFRS Framework).
Previously the IFRS conceptual framework (4.29) stated: "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. 4.30: Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in this Conceptual Framework."
The current IFRS conceptual framework (4.68) no longer draws a distinction between revenue and gains. Nevertheless, the distinction continues to be drawn at the standard and reporting levels. For example, IFRS 9.5.7.1 states: "A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss ..." while the IASB defined IFRS XBRL taxonomy includes OtherGainsLosses, GainsLossesOnNetMonetaryPosition and similar items.
US GAAP does not define income but does define comprehensive income (CON 8.4.E75): Comprehensive income is the change in equity of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
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)”.
"Nonincome"
Debt
Borrowing or repaying money is not income under any definition, for either the borrower or the lender.
Interest and
forgiveness of debt are income.
Psychic income
"Nonmonetary joy," such as watching a sunset or having sex, simply is not income.
Similarly, nonmonetary suffering, such as heartbreak or
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
, are not negative income. This may seem trivial, but the noninclusion of psychic income has important effects in economics and tax policy.
It encourages people to find happiness in nonmonetary, nontaxable ways, and means that reported income may overstate or understate the wellbeing of a given individual.
Income growth
Income per capita
The median income is the income amount that divides a population into two equal groups, half having an income above that amount, and half having an income below that amount. It may differ from the mean (or average) income. Both of these are ways of ...
has been increasing steadily in most countries. Many factors contribute to people having a higher income, including
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
,
globalisation
Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
and favorable political circumstances such as
economic freedom
Economic freedom, or economic liberty, is the ability of people of a society to take economic actions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the l ...
and
peace
Peace is a concept of societal friendship and harmony in the absence of hostility and violence. In a social sense, peace is commonly used to mean a lack of conflict (such as war) and freedom from fear of violence between individuals or groups. ...
. Increases in income also tend to lead to people choosing to work fewer
hours.
Developed countries
A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...
(defined as countries with a "developed economy") have higher incomes as opposed to
developing countries
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
tending to have lower incomes.
Income inequality
Income inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
is the extent to which income is distributed in an uneven manner. It can be measured by various methods, including the
Lorenz curve
In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing Economic inequality, inequality of the wealth distribution.
The curve is a graph o ...
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.
Thereby necessitating initiatives like the United Nations
Sustainable Development Goal 10 aimed at reducing inequality.
National income, measured by statistics such as
net national income In national income accounting, net national income (NNI) is net national product (NNP) minus indirect taxes. Net national income encompasses the income of households, businesses, and the government. Net national income is defined as gross domestic ...
(NNI), measures the total income of individuals, corporations, and government in the economy. For more information see
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 (GDP), gross national product (GNP), net national income (NNI), and adjusted nati ...
.
Income in philosophy and ethics
Throughout history, many have written about the impact of income on
morality
Morality () is the differentiation of intentions, decisions and actions between those that are distinguished as proper (right) and those that are improper (wrong). Morality can be a body of standards or principles derived from a code of cond ...
and
society
A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Socie ...
.
Saint Paul
Paul; grc, Παῦλος, translit=Paulos; cop, ⲡⲁⲩⲗⲟⲥ; hbo, פאולוס השליח (previously called Saul of Tarsus;; ar, بولس الطرسوسي; grc, Σαῦλος Ταρσεύς, Saũlos Tarseús; tr, Tarsuslu Pavlus; ...
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
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
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''.
Income and health
A landmark
systematic review
A systematic review is a Literature review, scholarly synthesis of the evidence on a clearly presented topic using critical methods to identify, define and assess research on the topic. A systematic review extracts and interprets data from publ ...
from
Harvard University
Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of higher le ...
researchers in the
Cochrane Collaboration
Cochrane (previously known as the Cochrane Collaboration) is a British international charitable organisation formed to organise medical research findings to facilitate evidence-based choices about health interventions involving health profess ...
found that income given in the form of
unconditional cash transfers
Unconditional or Unconditionally may refer to:
Music Albums
* ''Unconditional'' (Ana Popović album), 2011
* ''Unconditional'' (Clay Davidson album), 2000
* ''Unconditional'' (Memphis May Fire album), 2014
Songs
* "Unconditional", a 2011 song ...
leads to reductions in disease, improvements in food security and dietary diversity, increases in children's school attendance, decreases in extreme poverty, and higher health care spending.
History
Income is conventionally denoted by "Y" in economics. John Hicks used "I" for income, but
Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in m ...
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 phoneme I in languages like Spanish,
although Y as the "
Greek I" was actually pronounced like the modern German ü or the phonetic /y/.
See also
*
Basic income
Universal basic income (UBI) is a social welfare proposal in which all citizens of a given population regularly receive an unconditional transfer payment, that is, without a means test or need to work. It would be received independently of a ...
*
Comprehensive income
In company financial reporting in the United States, comprehensive Income (or comprehensive earnings) "includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Because that use ...
*
Income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
*
Unpaid work
Unpaid labor or unpaid work is defined as labor or work that does not receive any direct remuneration. This is a form of non-market work which can fall into one of two categories: (1) unpaid work that is placed within the production boundary of ...
*
Revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
References
Further reading
* D. Usher (1987). "real income", ''The
New Palgrave: A Dictionary of Economics'', v. 4, pp. 104–5.
{{Authority control