What Is Personal Income?

Personal income in national accounts calculations is the income actually received by households, factoring in various deductions and additions.

Personal income is an economic measure that reflects the total amount of income received by households within a given period. It is a crucial element within national income accounting and serves as a barometer for assessing the economic well-being of individuals.

Calculation of Personal Income

Personal income can be calculated by starting with the national income, subtracting certain amounts, and then adding others. The formula can be represented as:

$$ \text{Personal Income} = \text{National Income} - \text{Retained Corporate Profits} - \text{Corporate Income Taxes} - \text{Social Security Contributions} + \text{Transfer Payments} + \text{Interest Paid to Consumers} + \text{Net Government Interest Payments} $$

Components of Personal Income

Deductions from National Income

• Retained Corporate Profits: Profits that corporations choose to retain rather than distribute as dividends to shareholders.

• Corporate Income Taxes: Taxes levied on corporate earnings by the government.

• Social Security Contributions: Payments made by employers and employees to the Social Security system.

Additions to National Income

• Transfer Payments: Payments by the government to individuals, such as social security benefits, unemployment insurance, and welfare payments.

• Interest Paid to Consumers: Interest payments received by households for their investments in financial instruments such as bonds.

• Net Government Interest Payments: The difference between interest payments made to households by the government and interest payments made by households to the government.

Historical Context and Importance

The concept of personal income emerged as a part of the broader field of national income accounting during the development of modern economic systems. It was designed to give a more precise picture of the economic status of households, distinguishing between various flows of income and the distribution of resources within the economy.

Applicability in Economic Analysis

Economists and policymakers use personal income to:

• Assess the economic well-being of households.
• Design fiscal and monetary policies.
• Evaluate consumption trends and the overall economic activity.
• Determine eligibility for various social programs and benefits.

Comparisons with Related Terms

National Income

The total income earned by a nation’s residents and businesses, including payments made to foreign entities and excluding non-residents’ income earned within the country.

Disposable Income

The amount of personal income remaining after deduction of personal taxes; it represents the money available for spending and saving by households.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country during a specific time period.

FAQs

What is Personal Income Tax?

Personal income tax is a tax levied on individuals’ earnings, including wages, interest payments, dividends, and other sources of personal income.

How is Personal Income different from Disposable Income?

Personal income includes all receipts, while disposable income is adjusted for the taxes individuals must pay. Disposable income is the income available for households to spend or save.

Why is Personal Income important for economic policies?

It helps to gauge households’ purchasing power, influences fiscal policies, and impacts social welfare programs.

References

1. Bureau of Economic Analysis, U.S. Department of Commerce.
2. National Accounts at a Glance, OECD.
3. Keynes, J. M. (1936). “The General Theory of Employment, Interest, and Money.”

Summary

Personal income is a key element of national income accounting that reflects the actual income received by households, considering various deductions and additions. It is integral to understanding economic welfare, influencing policy-making, and analyzing economic trends. By distinguishing between different income flows, personal income provides a clearer picture of the financial status and consumption capacity of households.