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economic-dictionary

Disposable income is the income that families can make use of, after meeting tax obligations.

Therefore, disposable income is the income that remains, after subtracting taxes and social security charges from a household's income. This income can be used for consumption or savings.

In macroeconomics, including companies, we speak of national disposable income. In the case of companies, it would be necessary to subtract, in addition to tax obligations, amortizations.

Since it is the part of the budget that all families dedicate to consumption or savings, disposable income is considered the engine of private demand. Therefore, it is a key indicator of the state of the economy of a territory. This is because it reports the purchasing power of families.

National income

Calculation of national disposable income

To calculate the national disposable income (RND) we will take the national income as a reference, however, discounting the depreciations. That is, the net domestic product (PIN). This is obtained by subtracting the depreciation of assets in that period from the gross domestic product (GDP). See difference between GDP, GNP, PIN and PNN.

Mathematically, and expressing them in logical order until reaching the national disposable income, it would be expressed such that:

RNN = PIN + RNF

RND = RNN - T + TNC - Bnd

In terms of national accounting, we must take into account the following variables:

  • PIN or Net domestic product: Income generated within the national territory subtracting depreciation of assets.
  • RNF or Net Factor Income: Income generated by residents outside the national territory minus income generated by foreigners within the national territory.
  • RNN or Net national income: Income of a country after taking into account depreciation and net factor income.
  • T o Direct taxes: Taxes on companies, personal income tax and contributions to Social Security.
  • TNC o Net current transfers: Includes transfers from the State (social benefits) and those from abroad (aid from the European Union).
  • Bnd o Undistributed profits: Savings and reserves of companies.

Example of calculating national disposable income

To understand it in a simple way, we are going to give an example with variables that could well be related to a country.

Suppose country X, which returns the following results from its national accounts:

  • PIN: 854 million euros
  • RNF: 80 million euros
  • T: 92 million euros
  • TNC: 152 million euros
  • Bnd: 108 million euros

RNN = 854 + 80 = 934 million euros

RND = 934 - 92 + 152 - 108 = 886 million euros

Both net factor income (RNF) and net current transfers (TNC) can take negative values. A negative value in net factor income reflects that non-residents have generated more in the national territory than residents abroad. On the other hand, negative net current transfers (TNC) imply that we receive more transfers from abroad than we send.

Gross national product

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