Calculating Personal Income And Personal Disposable Income

 How To Calculate Personal Income and Personal Disposable Income

The formula for personal income is:

Personal Income = National Income – Undistributed Corporate Profits – Corporate Income Taxes – Social Security Taxes – Indirect Business Taxes – Depreciation – Net Foreign Factor Income Earned +Transfer Payment

Meaning of the Parameters

The formula for personal income provides a way to calculate the total income earned by individuals in an economy. It takes into account various components of the national income and adjusts for specific elements that affect personal income. Here, we'll explain each component of the formula in detail.

1. National Income: This is the total income earned by all factors of production, such as labour and capital, within an economy. It includes wages, salaries, rents, profits, and interest generated during a specific period.

2. Undistributed Corporate Profits: These are the profits that companies make but do not distribute to their shareholders as dividends. Companies may choose to retain these earnings for future investments or growth instead of distributing them to shareholders.

3. Corporate Income Taxes: These are the taxes that corporations pay on their profits. The government levies these taxes, and they vary depending on a corporation's income and jurisdiction. By deducting corporate income taxes, the formula accounts for the money that does not end up as personal income.

4. Social Security Taxes: These are taxes paid by both employees and employers to fund the Social Security program, which provides financial support to retirees, disabled individuals, and their dependents. Deducting these taxes prevents double counting, as contributions are not considered personal income.

5. Indirect Business Taxes: These are taxes paid by businesses on their purchases of goods and services, such as sales tax and value-added tax (VAT). Since these taxes are not directly related to personal income, they are deducted from the equation.

6. Depreciation: This refers to the loss in value of an asset over time due to wear and tear, obsolescence, or other factors. Depreciation is not part of personal income, as it concerns the value of assets owned by businesses.

7. Net Foreign Factor Income Earned: This component measures the difference between income earned by domestic factors of production from overseas sources and income earned by foreign factors of production in the domestic economy. Positive net foreign factor income indicates that domestic factors are earning more from overseas than foreign factors are earning domestically, while negative net foreign factor income indicates the opposite.

8. Transfer payment is a monetary disbursement made by a government or other organizations to individuals without any goods or services being exchanged directly in return. These payments are aimed at providing financial support and redistributing wealth to specific segments of the population, such as low-income households, the elderly, or the unemployed.

Examples of transfer payments in personal income can include social security benefits, unemployment benefits, food stamps, welfare payments, veterans' benefits, and disability payments. These payments help to improve the overall well-being of the recipients and can stimulate economic activity when recipients use the funds for consumption

By subtracting these components from National Income and Adding Transfer Payment, the formula for Personal Income measures the total income earned by individuals that are actually available to them for consumption, saving, or investment. This calculation provides a clearer picture of the overall economic well-being of the individuals in an economy and can be used to assess living standards and wealth distribution.