What do you understand by Private Income, Personal Income and Personal Disposable Income?

1. Private Income:

Private Income refers to income of non-governmental entities from all sources over a period of one accounting year. It represents income of firms and households from all possible sources. Incomes under this head include transfer payments and other unilateral transactions that equip private individuals and entities with purchasing power.

Image Source: startuplawblog.com

Table 2.37 lists various components of private income.

Table: 2.37:

Private Income = Domestic product accruing to the private sector + Net factor income from abroad (NFI from ROW) + Net other current transfers from ROW (NOCT from ROW) + Transfer payments (TP)+ National debt interest.

Employing alternative expressions for domestic product accruing to the private sector (Table 2.38), expressions for the private income can also be given as in Table 2.39.

Table: 2.38:

Domestic Product Accruing to Private Sector = Net Domestic Product at Factor Cost (NDP_FC) less Domestic product accruing to government sector.

Net domestic product at Factor Cost (NDP_FC) = Net national product at factor cost less net factor income from abroad

= NNP_FC – NFI from ROW.

Domestic product accruing to government sector = Income from property and entrepreneurship to government administrative departments + Savings of non-departmental enterprises.

Domestic product accruing to private sector = NNP_FC – NFI from ROW less [Income from property and entrepreneurship to government administrative departments + savings of non-departmental enterprises].

= NNP_FC – NFI from ROW – Income from property and entrepreneurship to government administrative departments – Savings of non-departmental enterprises

Table: 2.39:

Private Income = NDP_FC – domestic product accruing to the government + Net factor income from abroad + Net other current transfers from ROW + Transfer payments + National debt interest.

= NNP_FC – domestic product accruing to the government – Net factor income from abroad + Net other current transfers from ROW + transfer payments + Net factor income from abroad + National debt interest.

= NNP_FC – Income from property and entrepreneurship to government administrative departments – Savings of the non- departmental enterprises + Net other current transfers from ROW + Transfer payment + National debt interest

Some expressions in Table 2.37 need a brief introduction.

Net Other Current Transfers from ROW:

Such transfers refer to the balance of current transfers from the rest of the world over current transfers to the rest of the world. All these transfers are unilateral transactions.

Transfer Payments:

Unilateral transactions, such as old age pensions scholarships, etc., that have no compulsion of a quid pro quo, are known as transfer payments.

National Debt Interest:

It refers to interest paid by government on its borrowings from financial institutions such as Life Insurance Corporation, Unit Trust of India, etc. The interest paid by government finally trickles down to investors of the household sector and the firms.

2. Personal Income:

It is the income of the household sector over an accounting year from all the sources. It is that part of the private income which reaches the individuals in the household sector. In practice, it is the difference of private income over Corporate Profit Tax and Undistributed Profits.

Corporate Profit Tax is the tax levied on the profits of the business corporations. It does not trickle down to the household sector.

Undistributed Profits: In the same way, undistributed profits remain confined to the business firms for future business operations.

Table: 2.40:

Personal Income = Private Income Less Corporate Tax Less Undistributed Profits.

3. Personal Disposable Income:

After paying direct taxes such as income tax, government fees, fines, etc., the income left with household sector is called the Disposable Income. The household sector is free to spend or save the disposable income.

Table: 2.41:

Personal Disposable Income = Personal Income – Direct Taxes, Fees, Fines, etc.

Thus, personal disposable income is a part of the personal income. It is from this income that a household or a consumer shells out money for consumption and savings.