Income is a flow and wealth a stock
Definition
Income: the money a person or household receives over a period of time, such as each week, month or year.
Wealth: the total value of the assets a person owns at a single point in time, minus any debts they owe.
Distribution of income: how the total income of an economy is divided up between its households.
- Economists describe income as a flow, since it is measured over a period, and wealth as a stock, since it is measured at a single point in time.
- Saving is the bridge between the two, since income that is not spent adds to the stock of wealth.
- A high earner is not automatically wealthy, because someone on a large salary who spends all of it owns very little.
- Someone can also be wealthy on a small income, such as a retired person who owns a house outright but lives on a modest pension.
Common Mistake
- Do not use income and wealth as though they meant the same thing, because one is measured over a period and the other at a point in time.
- Do not count a house as income, since owning it is wealth while the rent it earns is income.
Income comes from several different sources
- Wages and salaries: payment for work done, which is where most household income in the UK comes from.
- Interest: the return a saver receives for lending money to a bank, a building society or the government.
- Rent: the payment an owner of land or property receives for letting someone else use it.
- Profit: what the owner of a firm keeps once all the costs of production have been paid.
- Benefits and pensions: money paid by the state, which is income to the household even though nothing is produced in return for it.
- Most households draw on more than one source, so a single figure for household income usually adds several of these together.
Example
- A household might combine one full-time salary, a part-time wage, a few pounds of interest from a savings account and Child Benefit.
- Adding those four together gives the household's income before any tax is taken off.
The distribution shows how income is shared
- The distribution of income is about shares, so it asks how much of the national total each group receives rather than how large that total is.
- The usual method is to rank households from poorest to richest, split them into five equal groups and compare what each group receives.
- Wealth is spread far more unevenly than income in the UK, because assets build up over a lifetime and can be passed on.
- The two are therefore measured and reported separately, even though a household's wealth grows out of its income.
How those shares are worked out is covered in 3.3.2, and why they differ so widely in 3.3.3.
Self review
- What is the difference between income and wealth?
- Name four different sources of household income.
- Why can a high earner have very little wealth?
- What does the distribution of income measure?
