INCOME
AND ITS USES
http://www.elateafrica.org/elate/entrepreneur/incomeanditsuses/meaningofincome.html
The
Meaning of Income
Income is the total
additional money an individual receives during a year from all
sources.
In contrast, wealth
is the value of the total stock of assets that a person owns at the
end of the year (or at a particular time). Wealth can be held in the
form of cash, savings in banks and "tangible" assets in the
form of possessions, buildings, land and any loans or capital owed to
them by others. Wealth can provide income in the future.
As far as individuals are
concerned, income may be in the form of:
1. wages or salaries
from work they undertake in a job
2. rents they receive
from hiring out land or buildings they own
3. profits made by
entrepreneurs from taking the risks involved in running a business,
once all other costs have been paid.
4. interest or dividends
on savings and loans they make to other businesses.
Interest is a reward for
sacrificing the use of your money by lending it to others.
The various payments can also be seen as the rewards received by the owners of the key Factors of Production (labour, land, capital and entrepreneurship):
1. Owners of Labour,
i.e. workers, receive reward for their efforts as wages and
salaries
2. Owners of Land receive
rental from their tenants
3. Owners of Capital
receive interest and dividends
4. Entrepreneurs
receive profits or incur losses if their businesses are unsuccessful.
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Sources
of Income
A
source of income refers to the base on which an individual or
institution earn its income.
Farming
activities, such as growing of crops and rearing animals, provide
cash income when the produce is sold. When the products are
consumed by the farmer and his family, it saves them have to buy
the products from someone else. In this case we say the products
provide income in kind. The total value of the income in
kind that is consumed by subsistence farmers is used to measure
the contribution of the subsistence sector to the gross domestic
product of the nation.
Trading
refers to the process of buying and selling with an aim of making
profits. When traders sell their products and sales revenue
exceeds the cost value plus other administrative expenses incurred
in the business, then traders realize profits, and profits
constitute income for entrepreneurs.
Other
entrepreneurs earn income from manufacturing goods. This includes
weaving baskets, mats, producing household consumables like bread,
etc. When these products are sold at a price higher than their
cost of production, the entrepreneurs earn profits which are an
income to them.
People
get income through providing services which other people are
willing to pay for, e.g. teaching, driving, hair dressing,
medication.
People
in paid employment earn income commonly known as wages or salaries
depending on the nature of job being done.
Activity
1
Learners are requested to make up groups of 10 students to do sanitary work at school after classes e.g. slashing the compound. This will enable students to experience earning a wage for their labour.
Activity
2
Request students to form groups of three to clean the staff vehicles at lunch time and after classes. As a result of the labour offered, these students will be paid a wage hence income for their school needs.
The
above activities help the learners know how rendering services and
paid employment result into earning income.
Activity
3
Ask
students to think of ways in which they could earn a profit.
Discussion:
For a sole trader is their a real difference between a wage and a
profit?
Ways
of using income
Income
can be used in the following ways:
Consumption
Income
earned from different sources is normally used for consumption by
the one who earned it. Consumption is buying household goods and
services, such as food and drinks, clothing and paying children’s
school fees.
Savings
Saving
is when people put aside part of their income for future use. The
choose to sacrifice current consumption in order to have more to
consume in future. They may also choose to invest in measures
which could raise their income and consumption in the future. Can
you think of an example of this?
Sometimes
people make short-term savings e.g. when they want to buy new
clothes. At other times they may make long-term savings e.g. when
they put aside some of their income to meet some anticipated
future needs like old age, sickness, or building a house.
People
may use the savings from their earned income for investment
purposes. They may invest by starting their own business, buying
productive resources e.g. land, houses, buying shares in other
businesses.
Ways
of increasing savings and investments
For
investment to take place, people and businesses must have saved a
bigger part of their income. Therefore if we are to make bigger
investments, then we have got to make bigger savings. Savings and
investments can be increased in the following ways:
1.Reduction
of consumption
If
one consumes more of his income, then s/he will have less left to
save. Likewise if one saves more of his/her income, then s/he will
have less income to consume (presently but more in future).
2.Provision
of banking facilities
If
secure banking facilities are provided to people, they will feel
confident and keep some of their income in there. For example,
Microfinance Institutions encourage people to make deposits which
accumulate and enable them to expand credit to the savers to meet
their investment plans.
3.Improvement
of investment factors
Savings
and investments can be encouraged and increased of the lives of
savers and values are secure. This will give them confidence about
the future and encourage them to save more.
4.Creation
of investment opportunities
There
are services and businesses which when provided or established in
an area will create further investment opportunities for other
different services like metal fabrication, food processing,
refrigeration services, etc.
5.Develop
attitudes of saving
If
investment is to be increased then a savings culture needs to be
developed among the people. This could be done through intensive
sensitisation through the media, workshops and other avenues.
Importance
of savings and investment
Sir
Arthur Lewis is famous throughout the world for his contribution
to economics. He was born on the island of St Lucia in the
Caribbean and was Professor of Economics at the universities of
Manchester, UK, Princeton, USA and the University of the West
Indies.
He
studied countries throughout the world and found that the ones
where people saved more raised their living standards faster than
other coutries with low savings. Countries that saved less than 5%
of their annual income stayed poor. Those that raised their
savings to more than 13% of their incomes grew richer. The same
applies to families.
Why
is saving so important?
Saving
takes resources away from current consumption and allows them to
be used for investment.
Investment
is the purchase of equipment, machines and improved ways to do
things which raises output and incomes.
In
rural
farming
investment allows people to pay for better ways to do things. They
can use their savings to invest in better stores for their food,
so less is lost to rodents, damp and disease. This frees up time
for them to do other things that increase their incomes. They can
invest in better tools and equipment to raise their productivity.
They can buy higher yielding seeds, fertiliser and improve their
land so that crop yields rise. They can also diversify and start
to grow a wider range of crops, rear animals and start their own
businesses.
In
the manufacturing
industries
investment allows firms to build better factories and employ more
efficient machines and methods of production. Firms are able to
invest by borrowing the savings of other people.
The
banks and other financial intermediaries play an important part in
this because they take the savings of individuals and lend the
money to firms. The money the banks earn from this allows them to
pay interest to savers, so everyone benefits.
Governments
also invest. The money they raise in taxes is used to build
schools, provide health care and improve roads and other transport
infrastructure. Schools provide important skills which allow
workers to be more productive - this is investment in human
capital. Health workers keep people fit and able to play their
full part in the workforce. Transport infrastructure is essential
to allow producers and consumers to get to market.
Forms
of savings
Activity
Encourage
learners to keep 50% of their pocket money (especially those
attending boarding schools) by the school bursar; this will enable
them learn how to save for the future.
Afterwards,
encourage them to think of ways in which they could use their
saved money to start up a small business e.g. a stationery shop
catering for the needs of their fellow students.
This
will help them learn saving and investing of the money saved and
hence entrepreneurial skills and income.
Are you a consumer or a saver and investor?
1)Characteristics
of people who prefer to consume most of their income
a)They
are very extravagant. They spend any income that comes their way
in things they need or may not need immediately.
b)They
live a luxurious life by purchasing luxury and expensive goods and
services that they come across, some of which may not even be
necessary but they just want to show off.
c)They
have low desire to save. Such people rarely save and invest their
income.
d)They
have got no investment plans for the future. This is because their
income is always spent as soon as they get it.
e)Their
incomes normally tend to be used for paying debts that were
incurred prior to being earned.
f)Whenever
they have any money that they have earned, they become unstable
all the time waiting to go out and spend it. They become stable
when the money has been exhausted.
2)Characteristics
of people who prefer to save
a)They
are very careful in their spending. Every expenditure has to be
justified in terms of need.
b)They
normally tend to live a simple life. They do not engage in
spending their income on luxury goods and services.
c)They
have high motivation to save and invest. They tend to give
priority to saving most of earned income.
d)They
tend to look at and take up every opportunity that is available
for them to save.
e)They
tend to prefer foregoing a lot of things at the beginning (at
times even necessities of life) performing to save for increased
future consumption.
3)Characteristics
of people who prefer to invest
a)They
are always on the lookout for investment opportunities that may be
available in their communities or elsewhere for them to invest.
b)They
tend to give priority to investment and much of their income is
reserved and used for investment.
c)They
normally tend to live a simple life as they spend most of their
income on capital goods and services that will lead to further
investment.
d)Such
people work longer at hard hours to earn more income so that they
can increase their savings and subsequently investment.
Making
plans for saving
This
requires one to forecast how, when and how much income s/he will
receive during a given period. This will require the person to be
through in making how to counteract them. The next step is to
develop a budget and in so doing, prioritise his/her needs. This
will entail in doing the following:
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