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Unit 2: National Income

2.2.5 NNPFC (or National Income) Notes

Goods and services are produced with the help of factors of production. National income or
NNP at factor cost is the sum of all the income payments received by these factors of production.
National Income = GNP – Depreciation – Indirect taxes + Subsidies

Since factors receive subsidies, they are added while indirect taxes are subtracted as these do not
form part of the factor income.
NNP = NNP - Indirect taxes + Subsidies
FC MP

2.2.6 Personal Income

As you have learnt earlier, national income is the total income accruing to the factors of production
for their contribution to current production but it does not represent the total income that
individuals actually receive.
Two types of factors account for the difference between national income and personal income.
On the one hand, a part of the total income which accrues to the factors of production is not
actually paid out to the individuals who own the factors of production. The obvious instances
are corporate taxes and undistributed or retained profits. On the other hand, the total income
that individuals actually receive generally includes some part that comes to be regarded as
payment for the factor services rendered in the current year, for example, gifts, pensions, relief
payments and other welfare payments. Such payments are known as "transfer payments" because
they do not represent the payments made for any direct contribution to current production.

Thus, personal income is calculated by subtracting from national income those types of incomes
which are earned but not received and adding those types which are received but not currently
earned.
Personal Income = NNP - Undistributed profits - Corporate taxes + transfer payments
FC
2.2.7 Disposable Income

Disposable income is the total income that actually remains with individuals to dispose off as
they wish. It differs from personal income by the amount of direct taxes paid by individuals.
Disposable Income = Personal Income - Personal taxes
DI = PI - T
So, PI = DI + T

Usually, people divide their disposable income between consumption spending and personal
saving.
We therefore have the following identities,

PI = DI + T
DI = C + S
It follows
PI = C + S + T

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