From the following data (Rs crore), calculate the Personal Income:
| Item | Amount |
|---|---|
| Net Domestic Product at factor cost | 6,000 |
| Net factor income from abroad | (−) 100 |
| Undistributed profits | 700 |
| Corporate tax | 400 |
| Interest paid by households | 300 |
| Interest received by households | 500 |
| Transfer payments to households | 250 |
| Personal tax payments | 450 |
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 5,250 crore
Given:
NDP at factor cost = 6,000
NFIA = −100
Undistributed profits = 700
Corporate tax = 400
Interest paid by households = 300
Interest received by households = 500
Transfer payments to households = 250
First find national income, then use PI = NI − Undistributed profits − Net interest payments by households − Corporate tax + Transfer payments.
NI = NDPFC + NFIA = 6,000 − 100 = 5,900
Net interest payments by households = 300 − 500 = −200
PI = 5,900 − 700 − (−200) − 400 + 250 = Rs 5,250 crore
Households receive more interest than they pay, so the net payment is negative. Subtracting a negative amount adds 200. Personal tax payments are not used: they come off later, for personal disposable income.
NCERT (2026-27): “2.3 Some Macroeconomic Identities We can further subdivide the National Income into smaller categories. Let us try to find the expression for the part of NI which is received by households. We shall call this Personal Income (PI). First, let us note that out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households. On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interests paid by the households to the firms and government. The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households. Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms. …” Glossary: “Net interest payments made by households – Interest payment made by the households to the firms – interest payments received by the households.” |