LeoGlossary: Income

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Income is the money received by an individual or company in exchange for labor, goods, or services.

This can have different meanings depending upon the context. Taxation, accounting and economics all handle it differently.

For individuals:

Income is the total earnings in the form of wages and salaries, the return on their investments, pension distributions, and other receipts.

For a business:

Income refers to revenues from selling services, products, and any interest and dividends received with respect to their cash accounts and reserves.

Types of Income:

Income is typically categorized as follows:

Gross Income: the total amount of wages or revenues without expenses taken into account.

Net Income: amount left after the deduction of taxes and fees

Discretionary Income: the amount of money left over after necessary expenses are paid. This is used by economics to judge the economy is doing. From an economic perspective, things are better when people have more money to spend on discretionary items.

Taxable Income: the amount that is subject to tax, after deductions are factored in.

Wage Inflation

One of the things that concerns economists is the idea of wage inflation. This is the belief that wages will spiral out of control as inflation expands, since workers require more money. This will provide a feedback into inflation, pushing prices higher since people have more money to spend.

It was a situation that was present during the Great Inflation of the 1970s in the United States. The impact is devastating when things get out of control as the economy is crushed under the weight of rapidly increasing prices.

Income growth is generally thought as a good thing. The key is the pace. When this occurs too quickly, prices can be severely affected.

During the inflation related to COVID, the challenge was prices increased due to supply chain issues while wages lagged. The household income did not increase at a pace to match the price jumps.

Income Inequality

Another metric economists watch is income inequality. This basically looks at the income levels of different tiers of society. When the upper end drastically outpaces the middle or lower classes, the spread is believed to be problematic.

Many economies are driven by consumption. When income inequalities rise, the wealth ends up pooling in the hands of a few people. The larger income earners are able to put more into savings and investment. They are able to compound their returns while the labor force is affected.

Economists believe that a certain amount of income inequality is necessary and healthy for an economy. When it gets excessive, this hinders growth to the point where unemployment goes up as revenues go down. This can be offset by the use of debt as long as consumers have access to more credit. This is why credit card and other debt balances are watched closely.

Income Growth

Economies strive to create income growth. This is a sign of health as people are starting to earn more.

Most countries use GDP-per-capita as a metric for how well their economies are doing. There are many factors going into this including the spread of technology through the economy, the level of education, business climate, and basic infrastructure. These have the potential to impact incomes as they improve within a nation.