2. Income and spending

People’s incomes determine how many of the economy’s goods and services they can purchase. Income is the money a person receives in exchange for work or property. There are five basic types of income:

• employee compensation is the income earned by working for others. It includes wages and fringe benefits such as health and accident insurance.

• proprietor compensation is the income that self-employed people earn.

• corporation profit is the income corporations have left after paying all the expenses.

• interest is the money received by people and corporations for depositing their money in savings account or lending it to others.

• Rent is income from allowing others to use one’s property temporarily.

The total income is the sum of employee and proprietor compensation, corporation profit, interest and rent. In each category, people receive this income in return for providing goods or services.

One other type of income is a transfer payment – money one person or group gives to another, though the receiver has not provided a specific good or service. Gifts, inheritances, and aid to the poor are three examples of transfer payments.

During the past century, the percentage of people who work for themselves has generally declined. Increasingly, people are employees and not self-employed.

By the type of work people do workers fall into one of four broad categories:

1. White-collar workers are people who do jobs in offices, such as secretaries, teachers, and insurance agents.

2. Blue-collar workers are people who do jobs in factories or outdoors. Artisans, such as carpenters and plumbers, are blue-collar workers.

3. Service workers provide services to other individuals or businesses. Janitors, barbers, and police are service workers.

4. Farm workers are people who work on their own farms or those of others.

In the market system a person’s income is determined by how the market values that person’s resources and skills. Individuals, such as doctors, whose skills society values, receive high incomes. People who own valuable resources, such as capital to invest or land to develop, also receive high incomes.

Income is not the same as wealth. Wealth is any resource that can be used to produce income. An individual’s possessions, such as house, a car, or jewelry, are part of that person’s wealth. Each of these could be sold to produce income. Savings accounts and corporation stocks are types of wealth that usually produce income. Labour skills are not counted because they are difficult to measure. In addition, an individual’s debts are subtracted from personal wealth. A person with many valuable possessions but many debts may have no more wealth than a person with a few possessions but no debts.

People with similar incomes may have very different amounts of wealth. Consider two women who receive an income of $25000 a year. One earns all of her income working at a bank. The other receives her $25000 income from dividends on stock worth $250000. Aside from the stock the second woman owns, the possessions and debts of the two are similar. The difference in stock ownership, though, is large. The second woman is much wealthier than the first woman.

When individuals receive any income, whether as allowance, paycheque, or gift, most of that income is spent. Spending becomes income for someone else. The money each individual spends multiplies throughout the economy as others receive and spend parts of it. In addition, the choice you and others make can lead to investment spending. More things are made and more places are built. Thus spending results in changes throughout the economy.