Difference between wealth and income

- [Instructor] Before talking
more about inequality,

I think it's worth talking
about the difference of what,

the difference between

wealth and income.

Wealth and income, because I
think they often get confused

in conversations about,
well, wealth and income

and also about inequality.

As you can imagine, these
two things move together.

You tend to associate someone

who has more wealth has 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,

wealth is,

you could view it as the capital
or the assets that you own.

So this is the value,

value of capital,

capital and assets

that you own,

capital and assets that are owned,

while this is how much is made
in a certain period of time,

so amount,

amount made

in a certain,

certain period.

And they tend to move
together but not always.

So let's take an example where
they don't move together.

So let's say that there's 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 grandparents,

or let's just say

your grandfather

has a wealth,

so the total assets, his total assets,

let's say he has a million dollars,

a million dollars in total assets.

But he's not working
anymore, he's retired,

so his total income,

his total income is the return

that he gets on that one million dollars.

And let's say that he has invested it

in reasonably safe things and
some bonds and whatever else.

And so he's getting a,

let's say he's getting a 3% 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,

let's say you,

maybe you're just out of college,

maybe you actually have more
debt than you have assets.

So maybe your wealth could
even be, your wealth if you,

if, you know, let's say
you have a $20,000-car,

but you owe $40,000
for your college loans,

you might have negative wealth.

You might have

a wealth of negative $20,000,

but you've, that
education was to good use,

you were able to get a really good job,

and you are now making,

let's say you're making $80,000 a year.

So this is a situation
where the younger person,

they actually have more
liabilities than they have assets,

could even have negative wealth,

but has a reasonably high income,

while someone who's older and retired

could have a lot of
wealth but a lower income.

Now, as you can imagine, this is a,

you know, this is kind of,
I've drawn two extremes here

between a younger person
making a good amount of money,

but they have some debt,

and an older person who's
just living on the returns

from their cumulated
wealth over their lifetime.

Now, as you could imagine,

these two things do start to correlate,

especially, for example, let's
say wealth got really big.

Let's say instead of your grandfather

saving one million over his lifetime,

let's say it was 10 million,

Let's say it's 10 million.

And he's investing it
in the exact same way,

so now that 3% of 10 million,

he has $300,000

per year to live off of.

So obviously, as wealth grows,

the income from wealth,

the income from that capital will grow.

And 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,

while other times they will
talk about accumulating,

the national income going more
and more towards the top 1%

or top 10% or the top
quartile or whatever.

And they often move together,

but it's important to
realize the difference.