Personal Income and Disposable Income

5 questions

Question 1Question

In a given fiscal year, an economy records a National Income of ₦850 million. The accounting records reveal corporate profit taxes of ₦60 million, undistributed corporate profits of ₦40 million, social security contributions of ₦30 million, government transfer payments to households of ₦50 million, and personal direct taxes of ₦70 million. What is the Disposable Personal Income of this economy in millions of Naira?

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Answer: 700

Answer

700 million Naira
Starting from National Income of ₦850 million, we subtract corporate profit taxes (₦60 million), undistributed corporate profits (₦40 million), and social security contributions (₦30 million), while adding transfer payments (₦50 million) to arrive at Personal Income of ₦770 million. Subtracting personal direct taxes of ₦70 million yields a Disposable Personal Income of ₦700 million.

Step-by-Step Solution

1
Calculate Personal Income from National Income by deducting earnings not received by households (corporate taxes, retained earnings, social security payments) and adding income received but not earned in current production (transfer payments).
Personal Income = ₦850 million - ₦60 million - ₦40 million - ₦30 million + ₦50 million = ₦770 million
Personal Income measures the total earnings received by households from all sources prior to personal direct taxation.
2
Deduct personal direct taxes from Personal Income to find Disposable Personal Income.
Disposable Personal Income = ₦770 million - ₦70 million = ₦700 million
Disposable Personal Income represents the net amount remaining for spending and personal savings after paying direct taxes.

Key Concept

Derivation of Personal Income and Disposable Personal Income from National Income
Question 2Question

In an economy, National Income is 500 billion500\text{ billion}, corporate profit tax is 40 billion40\text{ billion}, undistributed corporate profits are 30 billion30\text{ billion}, social security contributions are 20 billion20\text{ billion}, transfer payments are 50 billion50\text{ billion}, and personal direct taxes are 35 billion35\text{ billion}. What is the Disposable Personal Income of this economy?

Show answer & explanation

Answer: ₦425 billion

Answer

₦425 billion
Disposable Personal Income is obtained by first calculating Personal Income (National Income minus corporate profit tax, undistributed corporate profits, and social security contributions, plus transfer payments) and then subtracting personal direct taxes. Here, Personal Income=500403020+50=460 billion\text{Personal Income} = 500 - 40 - 30 - 20 + 50 = 460\text{ billion}, and Disposable Personal Income=46035=425 billion\text{Disposable Personal Income} = 460 - 35 = 425\text{ billion}.

Step-by-Step Solution

1
Calculate Personal Income (PI) from National Income (NI)
PI=500403020+50=460 billion\text{PI} = 500 - 40 - 30 - 20 + 50 = 460\text{ billion}
Corporate profit taxes, undistributed corporate profits, and social security contributions are earned income not received by individuals, whereas transfer payments are income received without corresponding current production.
2
Calculate Disposable Personal Income (DPI) from Personal Income (PI)
DPI=46035=425 billion\text{DPI} = 460 - 35 = 425\text{ billion}
Disposable Personal Income is the net income available to households after deducting personal direct taxes.

Key Concept

Personal Income vs Disposable Income Derivation
Estimated Time:1m 30s
Question 3Question

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?

Show answer & explanation

Answer: ₦610 million\text{₦610 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=PIPersonal 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=720110=₦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
Question 4Question

A sole proprietor in Lagos receives a total Personal Income of ₦680 million\text{₦680 million} during a given fiscal period. If direct personal income taxes paid to the government equal ₦115 million\text{₦115 million}, what is the trader's disposable income in millions of Naira?

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Answer: 565

Answer

The disposable income is 565 million Naira.
Disposable Income is defined as Personal Income minus Personal Direct Taxes. Subtracting ₦115 million from ₦680 million leaves ₦565 million available for expenditure and savings.

Step-by-Step Solution

1
Extract Personal Income and Direct Personal Taxes from the prompt.
Personal Income = ₦680 million, Direct Tax = ₦115 million.
Disposable income is calculated from gross personal earnings minus direct tax obligations.
2
Deduct direct taxation from total personal income.
565 million Naira.
Disposable income measures the income remaining after direct tax deductions, available for personal consumption and savings.

Key Concept

Calculation of Disposable Income
Question 5Question

In a macroeconomy, National Income is measured at ₦1,200 million\text{₦1,200 million}. Economic records show social security contributions of ₦85 million\text{₦85 million}, corporate profit taxes of ₦120 million\text{₦120 million}, undistributed corporate profits of ��95 million\text{��95 million}, and government transfer payments of ₦150 million\text{₦150 million}. Calculate the total Personal Income of the economy in millions of Naira.

Show answer & explanation

Answer: 1050

Answer

The total Personal Income is 1050 million Naira.
Personal Income is calculated by adjusting National Income: subtracting corporate profit taxes, undistributed corporate profits, and social security contributions, while adding government transfer payments. Thus, Personal Income=1200(85+120+95)+150=1050\text{Personal Income} = 1200 - (85 + 120 + 95) + 150 = 1050 million Naira.

Step-by-Step Solution

1
Calculate total deductions from National Income
300 million Naira
Social security contributions, corporate profit taxes, and undistributed profits represent earned income that households do not directly receive.
2
Adjust National Income by subtracting deductions and adding transfer payments
1050 million Naira
Transfer payments (such as pensions and welfare) are received by individuals without rendering immediate productive services, so they are added to determine total Personal Income.

Key Concept

Derivation of Personal Income from National Income
Personal Income and Disposable Income Practice Questions — JAMB UTME | Examkin