Personal disposable income (PDI) can be defined as ______.

The correct answer is PI - Personal tax payments - Non-tax payments.

Key Points

• The part of National Income (NI) that is received by households is referred to as Personal Income (PI).
  • First, let us note that out of NI, which is earned by the firms and government enterprises, a part of the profit is not distributed among the factors of production.
    • This is called Undistributed Profits (UP).
• We have to deduct UP from NI to arrive at PI since UP does not accrue to households.
• Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households.
• On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them.
• And households may have to pay interest to the firms and the government as well, in case they had borrowed money from either.
• So we have to deduct the net interests paid by the households to the firms and government.
• The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.
• Thus, Personal Income (PI) = NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
• However, even PI is not the income over which the households have a complete say.
• They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as Personal Disposable Income.
• Thus Personal Disposable Income (PDI ) = PI – Personal tax payments – Non-tax payments.
• Personal Disposable Income is part of the aggregate income which belongs to the households.
• They may decide to consume a part of it and save the rest.