Personal Disposable Income
GDP and national income must be carefully distinguished from personal disposable income (PDI) which is the amount actually available for spending and saving to the personal sector (which consists mainly of households but also unincorporated businesses and charities). To arrive at PDI we need to take account of three factors.
• Undistributed profits – not all profits earned by firms are paid out as dividends. Only the latter are included as personal income.
• Transfer payments – the personal sector also receives income in the form of transfer payments from the government. These comprise mainly pensions and other social security benefits paid to households. The personal sector may also make transfers abroad which accordingly reduce personal income.
• Taxes on income – both businesses (corporation tax) and households (income tax, NICs) pay taxes on their income which obviously reduces the amount available for spending and saving.
So, personal disposable income is defined as follows:
PDI = GNP – Undistributed profits + Transfers – Income Taxes
Note that retained profits are effectively business saving. In basic macroeconomic theory to simplify matters we usually ignore this and assume that all saving is done by households. Hence PDI is defined more succinctly as:
PDI = GNP + Transfers – Income Taxes
or, in symbols
YD = Y + TR – TA