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Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary 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, which defines income as Consumption + Change in net worth and is widely used in economics.
For and individuals in the United States, income is defined by tax law as a sum that includes any wage, salary, profit, interest payment, Renting, 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 is often defined as gross income minus and other deductions (such as mandatory pension contributions), and is widely used as a basis to compare the welfare of taxpayers.
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. Barr, N. (2004). Problems and definition of measurement. In Economics of the welfare state. New York: Oxford University Press. pp. 121–124
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 prevents a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income.
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
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.
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, SSI, gifts, child support, and in-kind government transfers.Brooks, John R., "The Definitions of Income"
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)".
Globalization can increase incomes by integrating markets, and allowing individuals greater possibilities of income increases through efficient allocation of resources and expanding existing wealth.
Generally, countries more open to trade have higher incomes.Dollar, D., & Kraay, A. (2004). Trade, Growth, and Poverty. The Economic Journal, 114(493), F22–F49. http://www.jstor.org/stable/3590109 And while globalization tends to increase average income in a country, it does so unequally.Goldberg, P. K., & Pavcnik, N. (2007). "Distributional effects of globalization in developing countries." Journal of Economic Literature, 45(1), 39-82. Sachs and Warner claim, that "countries with open economies will converge to the same level of income, although admittedly it will take a long time."Sachs, J. D., & Warner, A. M. (1995). "Economic reform and the process of global integration." Brookings Papers on Economic Activity, 1995(1), 103.
The total output of an economy equals its total income. From this viewpoint, GDP can be an indicator and measurement of national income since it measures a nation's total production of goods and services produced within the borders of one country and its total income simultaneously. GDP is measured through factors of production (inputs) and the production function (the ability to turn inputs into outputs). One important note in this is income distribution working through the factor market and how national income is divided among these factors. For this examination, the Neoclassical theory of distribution and factor prices is the modern theory to look into.
The proponents of UBI argue, that basic income is needed for social protection, mitigating automation and labour market disruptions. Opponents argue that UBI, in addition to being costly, will distort incentives for individuals to work. They might argue that there are other and more cost-effective policies that can tackle problems raised by the proponents of UBI. These policies include for example negative income tax.
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.
The Health Foundation published an analysis where people on the lower income spectrum were more likely to describe their health negatively. Higher income was associated with self-reported better health.The Health Foundation. (n.d.). Relationship between income and health - The Health Foundation. In The Health Foundation. https://www.health.org.uk/evidence-hub/money-and-resources/income/relationship-between-income-and-health Another study found that "an increase in household income of £1,000 is associated with a 3.6 month increase in life expectancy for both men and women."The Health Foundation. (n.d.). Relationship between income and life expectancy by neighbourhood - The Health Foundation. In The Health Foundation. https://www.health.org.uk/evidence-hub/money-and-resources/income/relationship-between-income-and-healthy-life-expectancy-by-neighbourhood
A study by a Professor of Epidemiology Michael G Marmot found argues that there are two ways which could explain a positive correlation between income and health: the ability to afford goods and services necessary for biological survival, and the ability to influence life circumstances.
Russell Ecob and George Davey Smith found that there is a relationship between income and a number of health measures. Greater household equivalised income is associated with better health indicators such as height, waist–hip ratio, respiratory function, malaise, limiting long-term illness.
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Accounting definitions
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).
"Nonincome"
Debt
Borrowing or repaying money is not income under any definition, for either the borrower or the lender. Interest and debt forgiveness are income.
Psychic income
"Non-monetary joy," such as watching a sunset or having sex, simply is not income. Similarly, nonmonetary suffering, such as heartbreak or labor, are not negative income. This may seem trivial, but the non-inclusion of psychic income has important effects on economics and tax policy. It encourages people to find happiness in nonmonetary, nontaxable ways and means that reported income may overstate or understate the well-being of a given individual.
Income growth
Income per capita has been increasing steadily in most countries. "Gapminder World". Gapminder Foundation. Many factors contribute to people having a higher income, including education, "Gapminder World". Gapminder Foundation. globalisation and favorable political circumstances such as economic freedom and peace. Increases in income also tend to lead to people choosing to work fewer working hours.
Developed countries (defined as countries with a "developed economy") have higher incomes as opposed to developing countries tending to have lower incomes.
Factors contributing to higher income
Education has a positive effect on the level of income.Mincer, J. (1974). Schooling, Experience, and Earnings. New York: National Bureau of Economic Research.Card, D. (1999). "The Causal Effect of Education on Earnings." In: Ashenfelter, O. and Card, D. (eds.), Handbook of Labor Economics, Vol. 3.Moretti, E. (2004). "Estimating the Social Return to Higher Education: Evidence from Longitudinal and Repeated Cross-Sectional Data." Journal of Econometrics Education increases the skills of the workforce, which in turn increases its productivity (and thus higher wages). Gary Becker developed a Human Capital Theory, which emphasizes that investment in education and training lead to efficiency gains, and by extension to economic growth.Becker, G. S. (1964). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Columbia University Press.
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. Thereby necessitating initiatives like the United Nations Sustainable Development Goal 10 aimed at reducing inequality.
National Income
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.
Basic income
Basic income models advocate for a regular, and usually unconditional, receipt of money from the public institution. There are many basic income models, with the most famous being Universal Basic Income.
Universal Basic Income
Universal Basic Income is a periodic receival of cash given to individuals on universal and unconditional basis. Unlike other programs like the Food Stamp Program , UBI provides eligible recipients with cash instead of coupons. Instead of households, it is paid to all individuals without requiring means test and regardless of employment status.
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:' ( (ASV)).
Income and health
A landmark systematic review from Harvard University researchers in the Cochrane Collaboration found that income given in the form of unconditional cash transfers 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 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
Further reading
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