Definition
Personal income refers to the total amount of income received by individuals or households before personal taxes are deducted. This measure is used to gauge the overall financial health of individuals within an economy and is a significant element in the national income accounts. It is calculated by adjusting the national income by subtracting retained corporate profits, corporate income taxes, and Social Security contributions, and then adding back transfer payments, consumer interest income, and net government interest payments.
Examples
- Wages and Salaries: Income received by employees for their labor or services.
- Social Security Benefits: Monthly payments provided to retirees, disabled workers, and survivors.
- Interest on Savings: Earnings from interest-bearing accounts like savings accounts or bonds.
- Transfer Payments: Funds provided by the government to individuals as part of social welfare programs, such as unemployment benefits or food stamps.
Frequently Asked Questions (FAQs)
What is the difference between personal income and disposable personal income?
Personal income is the total income received by households before personal taxes. Disposable personal income, on the other hand, is the amount left after personal taxes have been deducted from personal income.
How is personal income used in economic analysis?
Personal income is used to assess the financial well-being of households and to analyze consumer spending behaviors, which are critical components of economic performance and growth.
Why are transfer payments included in personal income?
Transfer payments are included because they represent income received by individuals without any corresponding production of goods or services. These payments supplement household income and are essential for financial stability, especially for those not employed.
What role do corporate profits play in the calculation of personal income?
Corporate profits not distributed as dividends and retained within the company are subtracted from the national income to derive personal income. This adjustment ensures that only income distributed to individuals is considered.
What components are subtracted from national income to arrive at personal income?
The primary components subtracted include retained corporate profits, corporate income taxes, and Social Security contributions.
- National Income: The total income earned by a nation’s residents both domestically and internationally, including wages, profits, and rents.
- Disposable Personal Income: The amount of money households have available for spending and saving after personal taxes have been accounted for.
- Transfer Payments: Payments made by the government to individuals without requiring any service or work in return (e.g., Social Security benefits, unemployment insurance).
- Gross Domestic Product (GDP): The total market value of all finished goods and services produced within a country in a specific period.
Online References
Suggested Books for Further Studies
- “Macroeconomics” by N. Gregory Mankiw - A comprehensive guide on macroeconomic concepts, including national income and personal income.
- “Economics” by Paul Samuelson and William Nordhaus - An essential textbook providing insights into personal income within the broader context of economics.
- “Principles of Economics” by Robert H. Frank and Ben Bernanke - An introductory book that explains fundamental economic concepts, including measuring national and personal income.
Fundamentals of Personal Income: Economics Basics Quiz
### What is personal income?
- [ ] Income from corporate profits retained by businesses.
- [ ] Income received after paying personal taxes.
- [x] The total amount of income received by households before personal taxes.
- [ ] Only the wages and salaries received by employees.
> **Explanation:** Personal income refers to the total amount of income received by households before any personal taxes are deducted.
### Which of the following is NOT subtracted from national income to calculate personal income?
- [ ] Corporate income taxes
- [ ] Retained corporate profits
- [ ] Social Security contributions
- [x] Transfer payments
> **Explanation:** Transfer payments are added, not subtracted, when calculating personal income. Components such as corporate income taxes, retained corporate profits, and Social Security contributions are subtracted.
### What component is added to national income in the calculation of personal income?
- [ ] Social Security contributions
- [ ] Corporate income taxes
- [x] Transfer payments
- [ ] Retained corporate profits
> **Explanation:** Transfer payments, which include benefits like Social Security and unemployment insurance, are added to arrive at personal income.
### What is the main purpose of transfer payments in personal income?
- [x] To supplement household income without requiring service or work in return.
- [ ] To increase corporate income.
- [ ] To reduce national income.
- [ ] To calculate corporate profits.
> **Explanation:** Transfer payments are designed to supplement household income without any corresponding production or service, making them crucial for individuals not engaged in employment.
### Why are retained corporate profits subtracted from national income?
- [ ] Because they are part of household income.
- [x] Because they are not distributed to households.
- [ ] Because they represent government earnings.
- [ ] Because they include Social Security benefits.
> **Explanation:** Retained corporate profits are subtracted from national income because they are not distributed to households and do not directly contribute to personal income.
### What is a key indicator of the financial health of households in an economy?
- [x] Personal income
- [ ] Corporate profits
- [ ] National debt
- [ ] Trade balance
> **Explanation:** Personal income is a key indicator as it represents the total income individuals receive and reflects their financial well-being.
### Which of the following is included in personal income?
- [ ] Corporate income taxes
- [ ] Retained earnings
- [x] Interest on savings accounts
- [ ] Social Security contributions
> **Explanation:** Interest income from savings accounts is included in personal income as it represents earnings received by individuals.
### How is disposable personal income different from personal income?
- [ ] It only includes wages and salaries.
- [x] It is calculated after personal taxes are deducted.
- [ ] It includes corporate profits.
- [ ] It excludes transfer payments.
> **Explanation:** Disposable personal income is the amount of income available to households after personal taxes have been deducted from their total personal income.
### What is the significance of net government interest payments in personal income?
- [ ] To calculate corporate income.
- [ ] To reduce social welfare.
- [ ] To increase national income.
- [x] To add to personal income as earnings received by individuals.
> **Explanation:** Net government interest payments are added to personal income as they represent interest earned by individuals from government securities.
### Identify a type of income NOT typically included in personal income.
- [ ] Wages and salaries
- [ ] Social Security benefits
- [ ] Interest on savings
- [x] Corporate retained earnings
> **Explanation:** Corporate retained earnings are not included in personal income since they are not distributed to individuals but kept within the corporation.
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