For a country (Rs crore): National Income 2,500; undistributed profits 300; corporate tax 200; personal income tax 450; fines paid by households 50; Personal Disposable Income 1,600. There are no interest payments between households and firms or government. What is the value of transfer payments to households?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs 100 crore
Given:
NI = 2,500
Undistributed profits = 300
Corporate tax = 200
Personal income tax = 450
Fines = 50
PDI = 1,600
No net interest payments
Work backwards. First find personal income from PDI, then the transfers from the PI identity.
PI = PDI + Personal tax payments + Non-tax payments
PI = 1,600 + 450 + 50 = 2,100
PI = NI − Undistributed profits − Corporate tax + Transfer payments
2,100 = 2,500 − 300 − 200 + Transfer payments
Transfer payments = 2,100 − 2,000 = Rs 100 crore
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. …” “2.3 Some Macroeconomic Identities … However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. Thus Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments. Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decide to consume a part of it, and save the rest. …” |