Recently, there have been reports on the radio and in the local newspapers on numbers that have come in on the average annual household income. The report states the average annual household income has fallen over a five-year period between the years 2000 and 2005. In 2000, the average annual household income was $55,714. In 2005, it is reported to have dropped to $55,238.
This, of course, has to be seen as bad news for the economy. What does it mean to our economic future, and what will happen if this number slips even further in the coming years?
What does the average annual household income indicate?
The average annual household income is one measurement used by economists to measure one of the functions of our economy. Namely it indicates the direction in which income is going. However, this measurement can be undependable, not always giving a clear picture of whether income is rising or falling.
Here's how. In the year 2000, the average household consisted of 2.62 persons. In 2005, the average household was made up of 2.57 persons. $55,238 divided by 2.57 is more than $55,714 divided by 2.62. So, even though household incomes drifted downward, each person's worth edged upward.
Two important measurements; GDP and GDP per capita.
The GDP is a measurement of the total size of an economy. It is the value of all the goods and services produced within a country's economy. Economists like to use the measurement known as GDP to get an idea of the financial worth of a nation.
GDP per capita is a measurement of the wealth of each individual of a particular country. GDP per capita is simply the total GDP of a country, divided by the population of that country.
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How can this be?
Take the example of a family of four earning $60,000 per year. One of the family members moves out. This person who moves out doesn't become a full-time employee until that time. Previously, he was in school, earning little or no money. So, after he moves out, he gets a job where he makes $30,000 per year.
Now if we take the average annual household income of these two families, the first being the family, now consisting of three people earning $60,000 and the second, the family of one, the young man who moved out and now earns $30,000 annually, we find when we average the household incomes of these two households, the average annual household income has fallen by $15,000. $60,000 divided by one household is $60,000 but $90,000 divided by two households equals $45,000.
The GDP per capita, on the other hand, has grown. The GDP per capita is now $90,000, divided by four persons, where it previously was $60,000, divided by four persons. So, another income earner in the economy is reflected in the GDP per capita, but the term average annual household income clouds this fact because even though another $30,000 is being earned by the population, an under average income family has been created.
By looking at the two different measurements of wealth of a country's earnings, you can get very contrasting ideas and come to differing ideas about its economy. This is why economists like to take a look at more than one indicator when they are trying to take a snapshot of an economy.
So then, a recession is not right around the corner?
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Do I think some misleading is done on purpose? Unfortunately, yes I do. A large percentage of the press today appear to have a bias against the current administration, and furthermore, they seem to not be above accentuating the negative every chance they get. Knowing people vote with their pocketbooks and wallets, many in the mainstream media, who clearly have a liberal leaning, seem to be doing everything they can to disparage the very strong economy we've enjoyed over the past several years.
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Ed Lathrop is a successful Real Estate investor. He has developed EzCalculator, a Mortgage Calculator that calculates anything to do with mortgages, shows you how to pay off credit card debt and now includes a free student loan calculator. This Free Mortgage Calculator, is home to the famous "How to Make $100,000 on Your Mortgage" calculator. Come visit this free site at Free Mortgage Calculator!
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