NATIONAL PRODUCT AT FACOTR COST

NATIONAL PRODUCT AT FACOTR COST

            National income is a measure of the sum of all factor incomes earned by the residents of a country both from within the country as well as abroad. It is infact an alternative name for net national product and factor cost. National income at factor cost or net national product at cost is the total income earned by a nation’s residents in the production of goods and services. It is inclusive of net factor income earned from broad. The main components of national income at factor costs, (i) wages and salaries paid by the firms to the employees (ii) Interest which is the payment for the use of funds (iii) rent and (iv) profit.

 PERSONAL INCOME

          National income is the sum of all factor income. In other words, it is the income which individuals receive for doing productive working the form of wages, rent, interest and profit, personal income, on the other hand, includes all income which is actually received by all individuals in a year. It includes income which is not directly earned but is received by individual. For example, social security payments, welfare payment are received by households but these are not elements of national income because they are transfer payments.

        In the same way, in national income according, individuals attributed income which they do not actually receive. For example, undistributed profits, employees contribution for social security corporate income taxes etc. are elements of national income but are not received by individual. Hence they are to be deducted from national income to estimate the personal income, personal income thus is:

P1 = NI + Transfer payment – corporate retained earnings income taxes, social security taxes.

 DISPOSABLE PERSONAL INCOME

            Disposable personal income is the amount which is actually at the disposal of households to spend as they like. It is the amount which is left with the households after paying personal taxes such as they income tax, property tax, national insurance contributions etc. thus:

Disposable personal income = personal income – personal taxes

DPI = PI – Personal taxes

    The concept of disposable personal income is very important for studying the consumption and saving behavior of the individuals. It is the amount which households can spend and save.

DI = C + S.