Question

What is personal income? How can one arrive at the personal income from the national income?

Short answer

Answer: The final step in calculating personal income from national income is to subtract social contributions and add government transfer payments to the personal income after considering corporate income. The formula is: Personal_Income = Personal_Income_after_corporate_income - Social Contributions + Government Transfer Payments

Step-by-step solution

Understand the Components of National Income

National income refers to the total value of income generated within a country during a specific period. It considers three factors: wages, interest, rents, and profits of businesses. It includes the net factor income from abroad (NFIA) and taxes on production and imports, minus any subsidies. The formula for National Income (NI) is: NI = GDP + NFIA Where GDP is the Gross Domestic Product and NFIA is the Net Factor Income from Abroad.

Calculate Net National Income at Factor Cost

To arrive at personal income from national income, first, calculate the Net National Income at Factor Cost (NNI_FC). Subtract taxes on production and imports, and add subsidies to get NNI_FC: NNI_FC = NI - Taxes on production and imports + Subsidies

Subtract Corporate Profits and Retained Earnings

Next, remove the portion of the national income that goes to corporations in the form of profits and retained earnings: Personal_Income_after_corporate_income = NNI_FC - Corporate Profits - Retained Earnings by Businesses

Subtract Social Contributions and Add Government Transfers

To calculate personal income, consider social contributions and government transfers. Subtract compulsory social security contributions and similar payments that individuals pay, such as pension contributions, and add the value of government transfers to individuals, such as unemployment benefits or social security pensions: Personal_Income = Personal_Income_after_corporate_income - Social Contributions + Government Transfer Payments This final value represents the personal income derived from the national income.