What is Personal Income?

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A concept of “income” appeared in society when a man realized an idea of money. In early history everything that a person could get in his or her possession was of natural, definitely tangible kind. Monetization of assets allowed accepting them in abstract form as something intangible. Income is a monetary funds and non-monetary material valuables gained by a government, physical persons and legal entities within a specified time frame as a result of any type of activity.

Personal income is earnings of a physical person received from all sources, including wages, bonuses, dividends, interest, rent and government or business transfer payments. Income exercises several functions, namely reproduction, incentive, status, regulation and distribution. With regard to inflation rate personal income could be either nominal or real. Total nominal income is simply sum of money received by a person in a given period of time. As a part of it an expendable income shows funds available for personal consumption and savings. It’s less than nominal income for the amount of taxes and obligatory payments. Finally real income amounts to the quantity of goods and services that could be purchased for the expendable income in a given time.

With regard to its form income splits into monetary (wages, business profits, pensions, scholarships, foreign exchange profits, earning from a property, mainly in a form of interest, rent, capital gains and dividends) and natural or in kind income (certain social disbursements, production of private farms and household manufactures; services, provided by family members). Natural income is more common in developing countries.

With regard to government involvement income may be separated into primary, which is formed solely by market means, and secondary, which originates in state redistribution policy. Therefore “personal income” term covers all forms of inflows, monetary and natural, coming from all possible sources (market driven or government transfers). In market economy major sources of personal income are:

  • Wages of employees and remuneration of free-agents/contract workers.
  • Business activity.
  • Earnings from use of property.
  • Social aid.

Wages or more generally compensation of employees is major element of household income. It equals to the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done according to labor agreement or contract. It’s necessary to distinguish between nominal and real wage, accrued and paid wage, statutory minimum and average wage.

Government social aid programs also make significant contribution to personal income of certain population groups. Most common transfers are pensions, state scholarships, paid sick leaves and unemployment compensations. Comparing with wages the main difference is that transfers do not depend on quantity and quality of a work done. In other words social transfer payments are funds, goods and services provided to certain individuals unilaterally without any equivalent charge. Social aid may be financed either from federal and local budgets or by non-governmental organizations.

Structure of personal income in different countries is driven by form of government, economical environment, common types of ownership and traditions. In its turn structure of income determines motives and results of people’s activity; relationship between different social groups; quality of living, which marks satisfaction level of material and cultural needs. Hence personal income influence not only individual’s living conditions but functionality of all social-economical systems.

On the level of public economics income usually refer to Gross Domestic Product or accumulation of income of all economic system entities. Because compensation of employees represents effectively a labor cost to an employer the total output of a nation equates to the total factor income received by its residents. Personal, household or social group income thus becomes relative part of the cost of manufactured product. Distribution of incomes precedes distribution of consumer goods so their parts of GDP individuals receive as a personal income.