VI National Disposable Income

STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING

VARUN MARG, DEFENCE COLONY, NEW DELHI

Teaching- Learning Material

(On the basis of weekly syllabus for the Month of August’ 2011)

For

Class XII PGT (Economics)

Chief Advisor

Ms. Rashmi Krishnan, Director, SCERT

Advisor

Dr. Pratibha Sharma, Joint Director, SCERT

Mohammad Zamir, Principal, DIET Keshav Puram

Co- ordinators

Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh

Ms. Meenakshi Yadav, Sr. Lecturer, SCERT

Contributors

Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh

Ms. Meenakshi Yadav, Sr. Lecturer, SCERT

Mr Bharat Thakur, PGT (Economics) RPVV, Surajmal Vihar

1 Support Material For Teachers In Economics – Class XII

Co-ordinators : Dr. Seema Srivastava Ms. Meenakshi Yadav

Contributors : Dr. Seema Srivastava Ms. Meenakshi Yadav Mr.Bharat Thakur

Technical Support : Sh. Mukesh Yadav Ms. Radha Class – XII

Teaching -Learning Material for PGT (Economics)

Based on “Week wise Distribution of Syllabus 2011 -2012

Content Covered: Unit-6 (Contd)

National Disposable Income

Learning objectives

After going through the material/ unit you will be able to:

• Explain the concept of Disposable Income.

• Define the term National Disposable Income.

• Describe Gross and National Disposable Income.

• Explain Private Income, Personal Income and Personal Disposable Income.

• Calculate Private Income, Personal Income and Personal Disposable Income.

• Define Real and Nominal GDP.

• Integrate welfare with change in GDP.

Abstract

The present content deals with National Disposable income which stands for amount of money that household have for spending and saving. The content also discusses the concept of Private Income, Personal Income and Personal Disposable Income. The concept of calculating these incomes have been explained with the help of numerical example. Nominal and Real GDP are also the part of the content. The integration of welfare of the economy with reference to GDP has also been described in the Present module. GDP per capita (per person) is often used as a measure of a person's welfare. Countries with higher GDP may be more likely to also score highly on other measures of welfare, such as life expectancy.

Teaching Points

The present unit deals with the following: • National Disposable Income

• Gross National Income

• Net National Income

• Private Income, Personal Income and Personal Disposable Income • Real and Nominal GDP.

• GDP and Welfare

National Income

National Income is an important dimension of Economy within the Global Project on Measuring the Progress of Societies and one of the key factors for Material Well-Being and, in turn, for Human Well-Being and progress of society. As almost every intermediate goal, it has different impacts, direct and indirect, on those that are defined final goals of progress in the Global Project. Moreover, depending on the definition given to such dimension, the impacts "direction" caused by variation in National Income on final goals of progress might be ambiguous as there could be both positive and negative associations.

National income is the sum of factor incomes. In other words, it is the income which individuals receive for doing productive work in the form of wages, rent, interest and profits.

Note: Social security payments, welfare payments are received by households but these are not elements of National Income because they are transfer payments

Disposable income

It is the amount of money that is available to households for spending and saving after income taxes have been accounted for.Disposable income is the amount that remains after all deductions (taxes, Medicare, pension contributions, etc.) have been made.

It is the portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also transfer income such as social-security benefits, pensions, and alimony. From this subtract Obligatory payments, including personal income taxes and compulsory social-insurance contributions.

* Disposable income may be used for consumption or saving. National Disposable Income

Gross (or net) national disposable income is the sum of the gross (or net) disposable incomes of the institutional sectors. Gross (or net) national disposable income equals gross (or net) national income (at market prices) minus current transfers (current taxes on income, wealth etc., social contributions, social benefits and other current transfers) payable to non-resident units, plus current transfers receivable by resident units from the rest of the world.

National disposable income is the sum of the disposable incomes of all resident institutional units/sectors.

National Disposable Income may be derived from National Income by adding all current transfers in cash receivable by resident institutional units from non-resident units and subtracting all current transfers in cash payable by resident institutional units to non-resident units

National Disposable income can be categorized into:

o Gross National Disposable Income o Net National Disposable Income

Gross National Disposable Income Gross National Disposable Income may be derived from gross national income by adding all current transfers in cash or in kind receivable by resident institutional units from non-resident units and subtracting all current transfers in cash or in kind payable by resident institutional units to non-resident units.

Gross (or net) National Disposable Income measures the income available to the nation for final consumption and gross (or net) saving. It equals gross (or net) national income (at market prices) minus current transfers in cash (taxes on income and wealth, etc., social contributions, social benefits other than social transfers in kind, and other current transfers) payable to non-resident units, plus transfers receivable by resident units from the rest of the world. Gross National Disposable Income =

Gross National Income (at market prices)

(-) minus current transfers (current taxes on income, wealth etc., social contributions, social benefits and other current transfers) payable to non-resident units,

(+) plus current transfers receivable by resident units from the rest of the world

Net Disposable Income

It is the gross earnings less ONLY ONE Mandatory Deduction i.e. State and Federal taxes

Private Income It is an income from sources other than employment, such as investment. It is also income from private means. It is the money that someone gets regularly, not from working but because they own part of a business or have money which earns INTEREST. Private income is either of the two :

• any type of income received by a private individual or household, often derived from occupational activities, or • Income of an individual that is not in the form of a salary (e.g. income from investments).

Income separate from salary income from dividends, interest, or rent which is not part of a salary are called as Private Income Personal Income

Personal income 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, undistributed profits, employee’s 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.

Formula for Personal Income:

PI = National income + Transfer Payments - Corporate retained earnings, income taxes, social security taxes

Disposable income

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.

Disposable Income = Consumption + Saving

DI = C + S

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.

Formula for Disposable Personal Income:

Disposable personal income = Personal Income - Personal Taxes

DPI = PI - Personal Taxes

Disposable Income Consumption (C) 300

Investment (I) 50 Government purchases (G) 70

Government transfer payments (TP) 15

Taxes (T) 75

Exports (X) 10

Imports (M) 5

To find Disposable Income (DI) first find GDP (Y).

Y= C + I + G + (X-M)

Y = 300 + 50+ 5 + 70

Y=425

Disposable Income= Gross Income - Taxes + Transfer Payments

DI = Y - T + TP

DI = 425 - 75 + 15

DI = 365

Nominal GDP vs. Real GDP

GDP or Gross Domestic Product is the value of all the goods and services produced in a country.

GDP is a measure of the market or money value of all final goods and services produced by the economy in a given year. We use money or nominal values as a common denominator in order to sum that heterogeneous output into a meaningful total. Since market value is measured by money, it is hard to compare the market values of GDP from year to year if the value of money itself changes in response to inflation and deflation. To solve this problem, we deflate GDP when prices rise and inflate GDP when prices fall according to a base year

Nominal GDP It is the GDP evaluated at current market prices. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.

Inflation is defined as a rise in the overall price level, and deflation is defined as a fall in the overall price level

Nominal GDP is unadjusted for inflation which refers to GDP based on the prices of a product in the year it was produced i.e. not inflated or deflated.

Real GDP Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year.

Real GDP is adjusted for inflation which refers to a GDP that has been adjusted for inflation or deflation to accurately show the increase or decrease in production for comparison of economic growth from year to year. It is measured in relation to the price index of a given year.

Nominal GDP represents the current prices of all types of services, and goods produced whereas Real GDP is the costs of the services rendered, and goods produced, that is indicated by various base years.

Example -1

Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then:

Year 2000 Nominal GDP = $100B, Real GDP = $100B Year 2001 Nominal GDP = $110B, Real GDP = $105B Nominal GDP Growth Rate = 10% Real GDP Growth Rate = 5%

Nominal GDP Nominal GDP is the calculation of national output using the quantity of the produced goods multiplied by the prices of that year.

Real GDP is the same calculation of national output but is adjusted for inflation. Inflation is the rate of change of the level of prices of goods. The reason inflation has to be accounted for is because if the same number of goods is produced in a subsequent year but the prices increase, then the Nominal GDP will be skewed to be larger than it really is.

Example-2

Calculate Personal Income, Disposable Income, National Income, and Net Domestic Product from the following;

Rs.

GDP 4000 Transfer Payments 500 Corporate Inc. Taxes 50 Social Sec. Contributions 200 Indirect business Taxes 210 Personal Taxes 250 Undistributed Corp. Profit 25 Depreciation 500 Net Income Earned Abroad 0

Solution

NI = GDP + NR - IBT - CC NI = National income NR = + or - Net income from assets abroad (net income receipts) IBT = Indirect business taxes CC = Depreciation

NI = 4'000 + 0 - 210 - 500 = 3'290

NDP = GDP - CC NDP = Net domestic product NDP = 4'000 - 500 = 3'500

Personal Income = NI - corporate taxes - retained earnings - social security + transfer payments + net interest

PI = 3'290 - 50 - 25 - 200 + 500 = 3'515

Disposable Income = PI - Personal taxes DI = 3'515 - 250 = 3'265

GDP and welfare

Another cross-cutting dimension as equity/inequality is found to be particularly relevant for "life satisfaction": from the perspective of living standards, what matters is that the distribution of income, consumption and wealth determines who enjoys access to the goods and services produced within a society. Since the most popular average measures of per-capita income and wealth give no indication of how the available resources are distributed across persons or households (similarly, average consumption gives no indication of how people effectively benefit from these resources), it is necessary to look at disposable income, consumption and wealth information for different groups to understand if the increase in national income is effectively beneficial in terms of progress: indeed, average income per capita can remain unchanged while the distribution of income becomes less equal and so, by negatively affecting many other dimensions of the Global Project framework.

To begin with, gross domestic product excludes a great deal of production that has economic value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-it- yourself home improvement) make it into the accounts of calculating GD. But all these affect our standard of living, our general level of economic well-being. Nor does it include the huge economic benefit that we get directly, outside of any market, from nature. For example: If you let the sun dry your clothes, the service is free and doesn't show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable -- and give G.D.P. a bit of a bump. GDP per capita (per person) is often used as a measure of a person's welfare. Countries with higher GDP may be more likely to also score highly on other measures of welfare, such as life expectancy.

Although GDP is often used to measure how well off people are in a material sense, it has serious deficiencies as a measure of economic welfare. There are serious limitations to the usefulness of GDP as a measure of welfare because:

• Measures of GDP typically exclude unpaid economic activity, most importantly domestic work such as childcare. This leads to distortions; for example, a paid nanny's income contributes to GDP, but an unpaid parent's time spent caring for children will not, even though they are both carrying out the same economic activity. • GDP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GDP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time. Similarly, the impact of economic activity on the environment is not measured in calculating GDP. • Comparison of GDP from one country to another may be distorted by movements in exchange rates. Measuring national income at purchasing power parity may overcome this problem at the risk of overvaluing basic goods and services, for example subsistence farming. • GDP does not measure factors that affect quality of life, such as the quality of the environment (as distinct from the input value) and security from crime. This leads to distortions - for example, spending on cleaning up an oil spill is included in GDP, but the negative impact of the spill on well-being (e.g. loss of clean beaches) is not measured. • GDP is the mean (average) wealth rather than median (middle-point) wealth. Countries with a skewed income distribution may have a relatively high per-capita GDP while the majority of its citizens have a relatively low level of income, due to concentration of wealth in the hands of a small fraction of the population. Technical Terms

National Disposable Income is the sum of the disposable incomes of all resident institutional units/sectors.

Gross national disposable income may be derived from gross national income by adding all current transfers in cash or in kind receivable by resident institutional units from non-resident units

Private Income: It is an income from sources other than employment, such as investment

Personal Income: Personal income includes all income which is actually received by all individuals in a year

Disposable Personal Income: Disposable personal income is the amount which is actually at the disposal of households to spend as they like

Nominal GDP represents the current prices of all types of services, and goods produced whereas

Real GDP is the costs of the services rendered, and goods produced, that is indicated by various base years.