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Understanding Income

Updated on January 2, 2010

Income is a payment for productive services. In modern society, incomes are usually received in the form of money. However, payments for services can be made in kind, such as lodging, board, or merchandise. It is important to distinguish between income and transfers of wealth. The money received from selling property or shares of stock is not income. It represents a payment for a transfer of wealth from one kind of asset to another.

Money and Real Income

An individual's money income is income measured in terms of currency. Real income measures his ability to purchase goods and services. Changes in money incomes do not necessarily mean changes in real incomes. When prices change to the same degree as money incomes, real incomes are unaffected because money purchases exactly the same goods and services as before.

Psychic Income

Economists have introduced the term "psychic income" to help explain why a worker may choose to stay in a lower-paying job when he can obtain higher wages elsewhere. Some form of psychic income, or psychological satisfaction, induces the worker to stay where he is. His psychic return may be that he likes the city where he works or the particular company that employs him. Psychic income may also induce a worker to join a low-paying industry. He may derive a feeling of importance from working in the industry, or he may have certain freedoms that do not exist in other industries and that compensate for the lower pay.

Types of Income

The most common form of income is wage or salary income, which workers receive in exchange for their labor services. Another form of income is rental income, received for the use of property. Those who lend money receive interest income from their borrowers. Corporation owners receive dividend income on their shares of stock. Owners of unincorporated businesses, such as farms or retail stores, receive proprietary income.

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