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.