Personal Income (P.I.) Vs. Disposable Income (D.I.)
Personal Income (P.I.) vs. Disposable Income (D.I.)
It is important to understand the concept of Personal Income (PI) and Disposable Income (DI) in order to understand the computation of National Income. Here is a simple effort to explain the difference between Personal Income and Disposable Income.
Personal Income (P.I.)
Personal Income (PI) is the total of all revenues in reality acknowledged in a household or by all individuals for the period of a particular year. National income (NI), implies, total income grossed and personal income or PI, implies, income acknowledged must be dissimilar for the straightforward explanation that some revenue which is earned such as, corporate income taxes, social security contributions, and undistributed corporate profits, is not in fact passed on to the households and, on the other hand, some revenue which is received in form of transfer payments is actually not currently earned,' (Transfer payments are old-age pensions, unemployment compensation, relief payments, interest payments on the public debt, etc.).
Obviously, in moving from national income as an pointer of income earned to personal income as an pointer of income actually received, we must deduct from national income those three types of income which are earned but not received and sum up income received but not presently earned.
For that reason, -
Personal Income = National Income+ Transfer Payments -Corporate Income Taxes- Social Security Contributions - Undistributed Corporate Profits.
The importance of the concept of personal income lies in the fact that it serves as a good indicator of what is happening to family well-being sand spending.
Disposable Income (D.I.)
The concept of disposable income tells us the amount of money available to individuals and households in a year for the purposes of spending. After a fine fraction of personal income is remunerated to the legal bodies or government as personal taxes such as personal property tax, income tax, etc., what are leftovers of personal income is termed as disposable income.
In short the formula for Disposable Income can be derived by subtracting personal Taxes from Personal Income (Personal Income — Personal Taxes). Disposable Income can also be consumed or set aside. Therefore, Disposable Income can also be derived by adding consumption and savings (Consumption + saving).
Disposable Personal Income and the Economy
Disposable income or disposable personal income (DPI) is the amount of money households after taxes have been paid or accounted for. Disposable personal income is an important indicator of how well the overall economy is doing.
For example, a household has an income of $100,000 and is in the 25% tax bracket would have a personal disposable income of $75,000 after taxes. Economist and the government use this DPI figure as a beginning point to gauge households' rates of savings and spending.
Economists will use the DPI as a starting point to calculate more important figures such as discretionary income, personal savings rates, marginal propensity to consume and marginal propensity to save.
More importantly to the average American is the discretionary income. Discretionary income is the amount of money a household has left to spend after paying necessary payments like mortgage, rent, food, and transportation.
Discretionary income is what the household decides to do with this leftover money, spend it or save it. Households might need to spend this money to pay down debt, buy a new washer and dryer, or anything else they decide to spend this money on.
Or a household can decide to save this money in a retirement account or for use at a later time.
As prices go up and wages rise very slowly if at all, this discretionary income falls. When food, insurance, rent and other prices rise, this leaves less discretionary money to spend or save.
This is not good for the overall economy. When households and consumers have less money to spend with discretionary income, the less money consumers have left to spend on consumer goods. So warehouses fill up, orders for new goods dry up and businesses that sell these products sell less. When businesses do less business, that can lead to layoffs.