Moving from GDP to Disposable Personal Income

National Income (NI), GDP, Net Domestic Product (NDP), Personal Income (PI), and Disposable Personal Income (DPI) tend to move together. Therefore, in future chapters we often use a single economic model to explain how all these data are determined. Nevertheless, un­derstanding how they differ helps illustrate how macroeconomics is linked to everyday life. You already know that capital consumption al­lowances (depreciation) are subtracted from GDP to compute Net Domestic Product (NDP), and that subtracting indirect business taxes (e.g., sales taxes) from NDP yields all income earned by suppliers of productive resources, or National Income (NI). More adjustments are needed, however, before arriving at household income before taxes (Personal Income) and the after-tax income households actually have left to spend (Disposable Personal Income).

From NI to Personal Income (PI): National Income includes wages, interest, rent, proprietors' income, and corporate profit. Firms often serve as tax collection points; in fact, some people never see parts of the income at­tributed to them. For example, corporate taxes must be paid before stockholders have claims on corporate income; these taxes must be sub­tracted from National Income. Dividends are parts of stockholders' Personal Income, but cor­porate retained earnings (undistributed corpo­rate profit) must also be subtracted from National Income. Moreover, all employers are legally obligated to match employees' Social Security contributions. National income ac­counts subtract all Social Security taxes from NI on this journey toward Personal Income.

Personal Income (PI): is the money income re­ceived by households before they pay their personal taxes.

In addition to household income earned but not received, two forms of income are received but not earned. A growing share of our National Incomeis devoted to government transfer pay­ments (e.g., welfare payments). Many firms also engage in charitable activities. Funds transferred through either government or business to private individuals must be added to National Income. At this point, we finally arrive at the total amount of personal income households receive.

From PI to Disposable Personal Income (DPI): You might think that Personal Income is the amount available for personal consumption and saving, but direct taxes on individuals must be paid from Personal Income. Disposable Personal Income (DPI) is income households can choose to consume or save after subtracting income taxes from Personal Income. Table 4 details the breakdown from GDP to DPI for selected years.

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