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Income and Wealth

Income is a flow of money – the amount earned during a period, whereas wealth is the accumulation of income which can be stored in assets such as property or shares. Therefore income is a flow and wealth is a stock. Wealth is less evenly distributed than income. Wealth can also provide an income through accumulated interest or dividend payments.

The Wealth Effect

When people are or perceive themselves to be richer then their consumption will increase. This can come about if they see a rise in their share portfolio or a rise in their house equity (the current value of the asset – the cost [mortgage] of the asset). However this increase in asset value isn’t tangible (unless sold) and is usually tied up in investments hence the increased consumption is fuelled by increased borrowing.

Page last updated on 20/10/13