To satisfy wants, man undertakes economic activity, in order to earn an income.
Definition of income
Income is “the total earnings of a person from all sources, in cash, kind or both, over a given period of time, usually a year”.
- Income may be earned in the form of cash, or kind, or a combination.
- Income is earned from different sources viz. land, labour, capital and enterprise.
- Income is considered for a given period of time ie it is a time bound and a flow concept.
Forms of income
- Combination of cash and kind
Income-in-cash is, “the total earnings of a person in cash or cheque from all sources over a given period of time usually a year”. It indicates the purchasing capacity (real income) of a person, which is inversely related to price level.
Income-in-kind is, “the total earnings of a person in the form of goods and services, from all sources over a given period of time usually a year”. It is a part of real income of a person which is independent of price level.
Combination of cash and kind
A person may receive income in terms of cash as well as kind.
Therefore his total earnings will be = Cash income + money value of kind income.
Sources of income
- Income is earned from different sources viz.
- Land – receives rent and royalty
- labour, receives wages and salaries
- capital receives interest and dividends and
- enterprise receives profits.
Features of income
- A person or institution earning the income
- The amount of income earned.
- The time period for which income is earned.
Types of income
- Contractual income and residual income
- Fixed income and fluctuating income.
Contractual income is determined on the basis of a contract signed between two parties. It is for work undertaken for others. It is fixed, stable, certain, positive and periodical. There is no element of risk and uncertainty in receiving the income. Rent wages and interest received by land, labour and capital respectively are examples of contractual income.
Residual income is income left after making all contractual payments. It is for work undertaken for self. It is fluctuating, unstable, uncertain, may be positive, zero or negative, and not necessarily periodical. There is an element of risk and uncertainty in receiving the income. Profits received by enterprise are an example of residual income.
Fixed income and fluctuating income.
Usually contractual income if fixed income.
However when the contract is in percentage terms contractual income will be fluctuating income.
Residual income is fluctuating income.
Concepts of income
- Money income is, “the total earnings of a person from all sources, in cash, over a given period of time, usually a year”
- Real income, “purchasing capacity of money income”. Real income is inversely related to price level.
- Psychic income is the satisfaction derived after consumption.
Money income is, “the total earnings of a person from all sources, in cash, over a given period of time, usually a year”
It is directly related to the economic activity.
It is a flow of money.
It indicates the purchasing capacity of a person.
It determines the standard of living of the person indirectly.
It is indirectly consumed.
Real income, “purchasing capacity of money income”. Real income is inversely related to price level.
It is dependent on the price level.
It is a flow of goods and services.
It shows what is purchased by a person.
It determines the standard of living of the person directly.
It is directly consumed.
Psychic income is the satisfaction derived after consumption It is felt, experienced. It may relative and subjective.
Unearned and unearned income
- Income may be earned is through economic / productive activity eg rent, wages, interest, profits etc.
- It may be unearned ie received without undertaking economic / productive activity eg inheritance, gifts, prizes donations etc.
Earned income is income earned is through economic / productive activity Earned income It is equal to economic/productive activity.
It considered while calculating national income.
Earned income is always legal.
eg rent, wages, interest, profits etc.
Unearned income is income received without undertaking economic / productive activity
It is not influenced by economic/productive activity.
It ignored while calculating national income but considered while calculating personal income.
Earned income may be legal or illegal.
eg inheritance, gifts, prizes donations etc.
A part of income is used
to pay TAX, ie “a compulsory payment made to government”
to the GOVERNMENT, ie “the highest administrative authority in the country.”
It is difficult to define savings.
In simple language savings means not spending i.e. creating assets in the form of money instead of exchanging money for commodities.
Therefore “Savings is abstinence from present consumption”
Saving is that part of the income that man does not devote to current consumption.
This amount may be deposited in a bank, invested in shares etc, or hoarded.
Saving is excess of income over expenditure incurred to meet current consumption.
It can be expressed symbolically as:
S = Y- C.
Savings are important for economic growth especially in developing countries. Higher the savings, higher will be the investment.
“Investment is savings mobilised into productive assets” or “savings utilised for further production”
`A’ buying a house form B is just a transfer of ownership it does not make any addition to the country’s stock of capital.
Investment therefore from the social point of view refers to spending on goods and services not for current consumption but to increase the productivity capacity.
Real investment involves the production and purchase of capital goods.
a) Plant and equipment.
c) Construction private and public.
d) Net foreign income ie. exports and imports.
Therefore investment is `that part of national income or national expenditure devoted to the prod of capital goods over a given period of time.’ Or `use of savings to buy capital goods or earn income or profit. ‘