Difference between wealth and income | Macroeconomics | Khan Academy

Before talking more about inequality, I think it's worth talking about the difference between wealth and income. Wealth and income often get confused in conversations about inequality. As you can imagine, these two things move together. You tend to associate someone who has more wealth with a higher income, or someone who has a higher income is more likely to have more wealth. But these are not the same things. Wealth is, you could view it as the capital or the assets that you own. This is the value of capital and assets that you own. Capital and assets that are owned, while income is how much is made in a certain period of time—so the amount made in a certain period.

They tend to move together but not always. So let's take an example where they don't move together. Let's say that there is a retiree. A retiree might have a lot of wealth because they've had a whole lifetime of income to save. So, let's say that your grandfather has wealth. His total assets, let's say he has a million dollars in total assets, but he's not working anymore; he's retired. His total income is the return that he gets on that one million dollars. Let's say he has invested in reasonably safe things, like some bonds and whatever else, and so he's getting, let's say, a three percent return after taxes on his wealth. So, his income is going to be $30,000 per year.

Now, let's say you—let's say this is you over here. Maybe you just graduated from college. Maybe you actually have more debt than you have assets. Your wealth could even be negative. If you have a twenty thousand dollar car but you owe forty thousand dollars for your college loans, you might have negative wealth. You might have a wealth of negative twenty thousand dollars. But that education was put to good use; you were able to get a really good job and you are now making, let's say, $80,000 a year.

This is a situation where the younger person actually has more liabilities than they have assets, could even have negative wealth, but has a reasonably high income. Meanwhile, someone who's older and retired could have a lot of wealth but a lower income. Now, as you can imagine, this is kind of extreme. I've drawn two extremes here between a younger person making a good amount of money but having some debt, and an older person who's just living on the returns from their accumulated wealth over their lifetime.

Now, as you can imagine, these two things do start to correlate. For example, let's say wealth got really big. Instead of your grandfather saving 1 million over his lifetime, let's say it was 10 million. If he invests it in the exact same way, now that three percent of 10 million gives him $300,000 per year to live off of. So, obviously, as wealth grows, the income from that wealth, the income from that capital will grow. At some point, that income could be larger than what you might be able to make purely from labor.

But the whole point of this video is to at least highlight the difference. Sometimes, when people talk about inequality or disparities, they'll talk about accumulating wealth in a segment of the population. Other times, they will talk about accumulating the national income going more and more towards the top 1 percent, or top 10 percent, or the top quartile, or whatever. They often move together, but it's important to realize the difference.