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Difficulty: MediumPersonal Income and Disposable Income

An economy records a total Personal Income of ₦720 million\text{₦720 million} in a given fiscal year. Within the same period, household personal direct taxes total ₦110 million\text{₦110 million}, government transfer payments are ₦45 million\text{₦45 million}, and social security contributions amount to ₦30 million\text{₦30 million}. What is the Disposable Income of households in this economy?

  1. A
    ₦535 million\text{₦535 million}
  2. ₦610 million\text{₦610 million}Answer
  3. C
    ₦655 million\text{₦655 million}
  4. D
    ₦830 million\text{₦830 million}

Answer

The Disposable Income of households in the economy is ₦610 million\text{₦610 million}.
Disposable Income (DIDI) is the portion of Personal Income (PIPI) that individuals have available for spending and saving. It is calculated strictly by subtracting personal direct taxes from Personal Income: DI=PI−Personal Direct Taxes=₦720 million−₦110 million=₦610 millionDI = PI - \text{Personal Direct Taxes} = \text{₦720 million} - \text{₦110 million} = \text{₦610 million}. Additional items such as transfer payments and social security contributions are already reflected in the Personal Income aggregate and should not be adjusted for a second time.

Step-by-Step Solution

1
Identify the relevant formula for Disposable Income (DI)
Disposable Income (DI)=Personal Income (PI)−Personal Direct Taxes\text{Disposable Income (DI)} = \text{Personal Income (PI)} - \text{Personal Direct Taxes}
Disposable Income represents the amount of income households have remaining after paying all mandatory direct taxes to the government.
2
Identify the values provided in the problem and filter out redundant components
PI=₦720 million\text{PI} = \text{₦720 million}, Personal Direct Taxes=₦110 million\text{Personal Direct Taxes} = \text{₦110 million}. Transfer payments (₦45 million\text{₦45 million}) and social security contributions (₦30 million\text{₦30 million}) are ignored.
Personal Income already includes transfer payments and excludes social security contributions. Any additional addition or subtraction of these items when deriving Disposable Income from Personal Income constitutes double counting.
3
Calculate Disposable Income
DI=720−110=₦610 million\text{DI} = 720 - 110 = \text{₦610 million}
Subtracting personal direct taxes directly yields the final disposable household income.

Key Concept

Derivation of Disposable Income from Personal Income
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Topics

Personal Income and Disposable Income

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