The Key Difference Between Wealth vs Income Effect

wealth effect vs income effect
Feature	Wealth Effect	Income Effect
Definition	Change in consumer spending due to perceived changes in wealth (e.g., rising asset values).	Change in consumption resulting from a change in a consumer's income.
Cause	Driven by fluctuations in asset values like real estate, stocks, or investments.	Driven by changes in wages, salaries, or other income sources.
Effect on Spending	Consumers feel richer and tend to spend more even if income remains the same.	Higher income increases spending; lower income reduces spending.
Timing	Occurs gradually as asset values rise or fall.	Immediate or short-term response to income changes.
Temporary or Permanent	Can be temporary, especially if asset prices are volatile.	Can be long-term depending on the nature of the income change.
Economic Impact	Impacts aggregate demand through changes in perceived wealth.	Directly influences consumption and savings behavior.
Examples	Home prices rise → homeowners feel richer → spend more.	Salaries increase → households spend more on goods and services.
Relevant In	Asset-driven economies and during bull markets.	Situations involving wage policies, taxation, or inflation.
Focus	Focuses on changes in net worth.	Focuses on actual changes in income flow.