Economics

Difference Between Personal Income and Disposable Personal Income

Distinguish between personal income and disposable personal income

Personal Income :

Personal income is another important concept in the study of National income. It refers to the actual income received by individuals and households in a country during a year. National income and personal income are different. All the national income is not considered personal income. Personal income is obtained after several deductions from national income. These deductions include a) Corporate profits. c) Social security contributions, c) Taxes paid by the business concerns. Besides, social security benefits such as unemployment alIlowance, oldage and widow pensions should be added to the above deductions. These payments made under the social security benefits are known as transfer payments.

Hence Personal Income =
National income — Corporate income taxes — undistributed coporate profits — Social contributions — Transfer payments.

The concept of personal income helps us to estimate the potential purchasing powers of households in a country. It also helps us to estimate the welfare of the consumers.

Disposable Personal Income (DPI) :

All the income received by individuals is not available for consumption purposes. Individuals have to pay direct taxes out of their personal income. So the amount of personal income available with the individuals after paying personal direct taxes is known as disposable personal income. It is this amount that is actually spent by individuals and households on consumption purposes. So

Disposable personal income = Personal income – Personal direct taxes.

A portion of personal income is saved by the individuals and households. Disposable personal income is obtained by adding savings and

Disposable personal income = Consumption + Savings.

This concept is useful for estimating the money burden of personal direct taxation. It is also useful for knowing the purchasing power and level of savings of the people. It is also useful for knowing the pressures of in nation and deflation on individual’s consumption.

National Income at Factor Costs (NIFC) :

This Concept measures the total remuneration received by the factors of production. Factors of production receive remuneration for their services. Rent, wages, interest and profit are the remuneration received by the four factors of production respectively. The entire net national product is not distributed among the four factors of production. The firms pay indirect taxes (on their goods and services) to the government. As this amount is not distributed among the four factors of production, they have to be deducted from net national product. Then only we get the national income at factor costs. If factors of production receive higher rewards due to government subsidies, such rewards should be added to the net national product. Hence National income at factor costs is explained by the following formula:

National Income at Factor Costs (NIFC)=NNP-Indirect Taxes+Subsidies at factor costs.

 

 

Tags
Show More

Related Articles

Close