Distinguish between income and wealth

This is a pretty typical examination question. For me, it’s the kind of question where I’m like, “Yeah, of course I can do that.” But when someone asks me to sit down and write this for two marks, I’m like…

Let’s get this straight once and for all.

Income is the amount of money, financial rewards or benefits that flow to individuals or households. Income is received for a person’s contribution to the production process (so wages for labour, rent for land) or as a payment from the government (transfer/welfare payments).

Wealth is different.

Wealth is the value of the stock of assets held by individuals. This could include property, shares, superannuation, fancy art and so on.

To get a little technical, income is a flow concept and wealth is a stock concept. A stock concept is a measure of how much you have a thing at a particular point in time (the value of your assets on a certain date). Stock is like a snapshot. A flow concept is measured over a period of time, such as the value of your salary over a period of a year.

Here’s some extra info about the difference between the two.

Something valuable to add could be the link between income and wealth. Put simply, it is easier to build wealth with a higher income. This is because higher income earners do not spend all their income on living costs. They can afford to save their money and use it invest, buy assets and build wealth.

So a higher income doesn’t guarantee greater wealth...but it sure helps.

As they like to say: “wealth begets wealth”.