The sum of net value added by all the production units in the domestic territory is net domestic product of factor cost (NDPFC). All the income generated in a year is not received by consumer households.
- Income from property and entrepreneurship accruing to the departmental commercial enterprise of the government is retained by the government.
- Secondly non-departmental enterprises of the government save a part of their profits for future expansion. This too is not available for distribution.
If these two sums are deducted from NDPFC, we get income from domestic product or NDPFC accruing to private sector.
Income from domestic product accruing to private sector = NDPFC
– income from property and entrepreneurship accruing to government administration department savings of non-departmental enterprises
(i) Private income : Private income consists of factor incomes earned within the domestic territory and abroad by private enterprises and workers (factor owners in the private sector) and current transfer from government and the rest of the world.
Private income = Income from domestic product accruing to private sector
+ Net factor income from abroad
+ national debt interest
+ current transfers from government
+ other current transfers from the rest of the world (net)
(ii) Personal income : Personal income is defined as the current income of persons or households from all sources. We have to deduct undistributed profit and corporate tax payable by the enterprise from private income to arrive at personal income
Personal income = private income
– saving of private corporate sector (undistributed profit)
– corporation tax
(iii) Personal disposable income : The household cannot spend the entire personal income. Government takes away a part of it by way of income tax and other miscellaneous taxes such as education tax, fire tax, sanitation tax. These taxes have to be deducted from personal income to arrive at personal disposable income.
Personal disposable income = Personal income
– direct taxes paid by the households
– miscellaneous receipts of the government.
Personal disposable income is the income available to persons from all sources to dispose of as they choose.
Bibliography : NIOS – Economics