National Income at Factor Cost

National income at factor cost 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 at factor cost. National income at factor cost or Net National product at factor 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 abroad. 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.

(E) PERSONAL INCOME

National income is the sum of factor income. In other words, it is the income which individuals receive for doing productive work in the form of wages, rent, interest and profits. 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 individuals. For example, social security payments, welfare payments are received by households but these are not elements of national income because they are transfer payments.

In the same way, in national income accounting, individuals are 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 individuals. Hence they are to be deducted from national income to estimate the personal income. Personal income thus is:

PI = NI + transfer payments — Corporate retained earnings, income taxes, social security taxes.

(F) 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 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 behaviour of the individuals. It is the amount which households can spend and save.

Disposable income = Consumption + Saving

DI = C + S

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