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Economic Concept of Income

Economics define income as the maximum amount of assets that a business enterprise could distribute to its owners during an accounting period and still be as well off at the end of that period as it was at the beginning. The amount which a man can consume during a period and still remain as well off at the end of the period as he was at the beginning. The emphasis is clearly on the words “as well off”. Unlike accounting income, economic income is measured in real terms by eliminating the effect of the changing value of money on account of inflation of deflation. Moreover the economic income results from the changes in the value of assets and capital at the beginning and end of a period rather than from the matching of revenues and expenses. Thus, the basis of definition of economic income is consumptions in the given period plus changes in the value of capital.

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