Personal Income and Disposable Income

National Income (NNP at Factor Cost) is the income earned by all factors of production in a year, but it is not the same as the income actually received in hand by households — some of what firms earn never reaches households at all, and households additionally receive some income they did not earn through current production.

Personal Income (PI) adjusts National Income for exactly this gap:

• Corporate tax and undistributed profits are earned by companies but never paid out to shareholders/households, so they must be subtracted.
• Social security contributions (employee provident fund and similar deductions) are earned by employees but withheld before reaching them.
• Transfer payments — old-age pensions, scholarships, unemployment relief, interest on public debt paid by the government to households — are income households receive even though they performed no current productive service in exchange, so these must be added even though they are not part of National Income.

Disposable Income (DI) goes one step further, adjusting Personal Income for what households actually get to keep and spend or save:

$DI = PI - \text{Direct Taxes (paid by individuals)} - \text{Miscellaneous Fees and Fines}$ …