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Question

Difficulty: MediumEconomic Growth, National Income Accounting, and Development Indicators

With reference to national income accounting concepts and identities, evaluate the following statements:

I. Personal Disposable Income (PDIPDI) is derived by deducting personal tax payments and non-tax payments (such as fines and fees) from Personal Income (PIPI).
II. Government transfer payments to households are included in Personal Disposable Income, but excluded from National Income (NNPFCNNP_{FC}).
III. Undistributed corporate profits and corporate tax payments are added to National Income when calculating Personal Income.

Which of the statements given above are correct?

  1. Statements I and II onlyAnswer
  2. B
    Statements I and III only
  3. C
    Statements II and III only
  4. D
    Statements I, II, and III

Answer

Statements I and II only are correct.
The combination statement affirming Statements I and II only is correct. Statement I accurately states the formula for Personal Disposable Income after deducting tax and non-tax liabilities. Statement II correctly highlights that transfer payments are unilateral receipts excluded from factor-based National Income but included in household income. Statement III is false because corporate taxes and undistributed profits are deducted, not added, when calculating Personal Income from National Income.

Step-by-Step Solution

1
Evaluate Statement I regarding Personal Disposable Income (PDIPDI)
Statement I is correct.
Personal Disposable Income represents the actual income available to households for consumption and saving. It is defined as: PDI=Personal Income−Personal Tax Payments−Non-tax Payments (fines, fees)PDI = \text{Personal Income} - \text{Personal Tax Payments} - \text{Non-tax Payments (fines, fees)}.
2
Evaluate Statement II regarding transfer payments
Statement II is correct.
National Income (NNPFCNNP_{FC}) measures only factor earnings earned for productive services. Transfer payments (such as old-age pensions or unemployment relief) are unearned receipts; hence, they are excluded from National Income but included in Personal Income and Personal Disposable Income.
3
Evaluate Statement III regarding Personal Income derivation from National Income
Statement III is incorrect.
Personal Income (PIPI) is calculated as: PI=National Income−Undistributed Profits−Corporate Tax−Net Interest Payments by Households+Transfer PaymentsPI = \text{National Income} - \text{Undistributed Profits} - \text{Corporate Tax} - \text{Net Interest Payments by Households} + \text{Transfer Payments}. Undistributed corporate profits and corporate taxes are earnings of the corporate sector that are not distributed to households, so they are deducted from National Income.

Key Concept

Personal Disposable Income and National Income Identities
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Topics

Economic Growth, National Income Accounting, and Development Indicators