Aggregate income is the total of all incomes in an economy without adjustments for

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

taxation A tax is a mandatory financial charge or levy imposed on an individual or legal person, legal entity by a governmental organization to support government spending and public expenditures collectively or to Pigouvian tax, regulate and reduce nega ...

, or types of double counting. Aggregate income is a form of

GDP Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...

that is equal to Consumption expenditure plus net profits. 'Aggregate income' in economics is a broad conceptual term. It may express the proceeds from total output in the economy for producers of that output. There are a number of ways to measure aggregate income, but GDP is one of the best known and most widely used.

Measurement using GDP

GDP stands for gross domestic product. GDP is a measure of the economic output of a country. It is usually defined as the total market value of goods and services produced within a given period after deducting the cost of goods and services used up in the process of production, but before allowances for depreciation. Most countries compile estimates of their GDP based on guidelines from the United Nations. GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M). Y = C + I + G + (X − M) Here is a description of each GDP component: C (consumption) is normally the largest GDP component in the economy, consisting of private (

household final consumption expenditure Household final consumption expenditure (HFCE) is a transaction of the national account's use of income account representing consumer spending. It consists of the expenditure incurred bresidenthouseholds on individual consumption goods and servic ...

) in the economy. These personal expenditures fall under one of the following categories:

durable goods In economics, a durable good or a hard good or consumer durable is a Good (economics), good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely Consumption (economics), consumed in o ...

, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing. I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of

financial products Financial services are economic services tied to finance provided by financial institutions. Financial services encompass a broad range of service sector activities, especially as concerns financial management and consumer finance. The financ ...

. Buying financial products is classed as '

saving Saving is income not spent, or deferred Consumption (economics), consumption. In economics, a broader definition is any income not used for immediate consumption. Saving also involves reducing expenditures, such as recurring Cost, costs. Methods ...

', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s is a swapping of

deed A deed is a legal document that is signed and delivered, especially concerning the ownership of property or legal rights. Specifically, in common law, a deed is any legal instrument in writing which passes, affirms or confirms an interest, right ...

s, a transfer of claims on future production, not directly an expenditure on products. G (government spending) is the sum of

government expenditures Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...

final goods A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike an intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good. W ...

and services. It includes salaries of

public servants The civil service is a collective term for a sector of government composed mainly of career civil service personnel hired rather than elected, whose institutional tenure typically survives transitions of political leadership. A civil service offic ...

, purchases of weapons for the military and any investment expenditure by a government. It does not include any

transfer payments In macroeconomics and finance, a transfer payment (also called a government transfer or simply fiscal transfer) is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in r ...

, such as

social security Welfare spending 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 specifically to social insurance ...

unemployment benefits Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is the proportion of people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work d ...

. X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added. M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign

supply Supply or supplies may refer to: *The amount of a resource that is available **Supply (economics), the amount of a product which is available to customers **Materiel, the goods and equipment for a military unit to fulfill its mission *Supply, as ...

as domestic.

Components

There are a number of different variables that go into determining aggregate income. Those variables include: Employee income: Combined incomes of all employees in a nation before any taxes are taken from that income. Business owner income: Income that is earned by business owners through the operation of their businesses. Rental income: Income that is earned by real estate owners who charge rent for the use of their properties. Corporate income: Income that is earned by corporations. Interest income: Income that is earned through the payment of interest on invested funds. Government income: Income earned by the government of a country. Government subsidies: Money that the government pays to employees, business owners, real estate owners, corporations and interest earners.

Calculation

Aggregate income is gross income, and the term generally refers to the combined incomes of a couple filing a joint tax return. It includes income from all sources. Now that we know which variables are needed to determine aggregate income, we will look at the formula for its calculation. First, let's assign some abbreviations to the variables that were discussed. E = Employee income B = Business owner income R = Rental income C = Corporate income I = Interest income G = Government income S = Government subsidies The formula to determine aggregate income is as follows: Aggregate Income = E + B + R + C + I + ( G - S ) Notice that government subsidies are subtracted from government income before all of the sum of the other factors is determined.

Advantages

For households, determining the amount of aggregate income generated over the course of a calendar year can be advantageous when calculating the total taxes due for that period. In a number of nations, federal tax agencies provide some incentives for spouses to file joint tax returns, rather than each spouse filing separately. By choosing to aggregate their generated income for the tax period, the household is likely to owe fewer taxes and thus receive a higher joint return than they would have received with individual returns. Businesses can also benefit from the aggregate income model when calculating expenses of various types. This is especially true when planning

budgets A budget is a calculation plan, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environment ...

for various departments. Along with identifying the individual salaries and wages of current employees, the department can also incorporate resources into the budget plan that allow for granting cost of living increases, merit increases, and possibly adding additional personnel during the budget period. Considering the aggregate income projected for the upcoming operational year allows the business to plan in a manner that ensures it is possible to maintain the right balance in the

workforce In macroeconomics, the workforce or labour force is the sum of people either working (i.e., the employed) or looking for work (i.e., the unemployed): \text = \text + \text Those neither working in the marketplace nor looking for work are out ...

, while still remaining within budget. Aggregate income is also important to the calculation of the

Gross Domestic Product Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performanc ...

of a country. Generally, this figure is calculated without allowing for income from

taxes A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

or adjusting the figures for

that occurs during the period under consideration. Calculating the cumulative income of all the entities involved makes it easier to identify true GDP with more accuracy, and thus allow lawmakers to be in a better position to enact legislation that will help make it easier to reach and maintain a

balanced budget A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). More generally, it is a budget that has no budge ...

. The key function of aggregate income is for the specified group to accurately understand how much income is generated during the identified period of time. This in turn creates the basis for identifying ways to make use of that income so that the highest degree of satisfaction is realized from the efforts used to generate that income. This simple principle of distribution economics helps to create sound financial bases that prepare the group for the future, and make it possible to obtain goals that would have been difficult to achieve if the approach were to consider individual incomes only.

References