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AD-AS MODEL: An economic model relating the price level and real production that is used to analyze business cycles, gross domestic product, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The AS-AD model, inspired by the standard market model, captures the interaction between aggregate demand (the buyers) and short-run and long-run aggregate supply (the sellers).

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PERSONAL INCOME AND NATIONAL INCOME:

Personal income (PI) is the total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time. National income (NI) is the total income earned by the citizens of the national economy resulting from their ownership of resources used in the production, which may or may not be received by members of the household sector. Personal income can be derived from national income by subtracting income earned but not received (IEBNR) and adding income received but not earned (IRBNE).
A sizeable majority of national income earned by the factors of production is also received as personal income by the household sector. Moreover, a sizeable majority of the personal income received by the household sector is also earned by the factors of production.

However, some income is earned but not received and some income is received but not earned. While not all of the differences between income earned and received are attributable to the government sector, most are. The major government activity differentiating national and personal income is the Social Security system, which uses taxes collected from the income earned by labor to provide benefits to the elderly and disabled.

Two Adjustments

Deriving Personal Income

Before discussing the specifics of income earned but not received and income received but not earned, consider the exhibit to the right. The large vertical block represents national income, income earned by the factors of production. The trick is to make a couple of adjustments needed to derive personal income.
  • IEBNR: The first adjustment is to subtract income earned but not received. This can be demonstrated by clicking the [IEBNR] button in the exhibit.

  • IRBNE: The second adjustment is to add income received but not earned. This can be demonstrated by clicking the [IRBNE] button in the exhibit.
The resulting blue vertical block is personal income.

Income Earned But Not Received

The three types of income earned but not received by the factors of production are Social Security taxes, corporate profits taxes, and undistributed corporate profits. In each case a factor of production has rightfully "earned" the income by contributing to valuable production contained in gross domestic product. However, because this income is not paid to the factor, it is not income received by the household sector.
  • Social Security Taxes: Social Security taxes are "contributions" to the Social Security system made by labor. The Social Security system is set up to transfer income earned by labor to the elderly and disabled. In principle, employees "contribute" about 7 percent on the first $60,000 (or so) of their wages (the F.I.C.A. deduction). Employers then match this contribution. In reality, the entire 14 percent is income earned by the employee. Social Security taxes are wages earned, but not received.

  • Corporate Profits Taxes: Corporate profits are earned by corporate shareholders through their ownerships of capital, land, and entrepreneurship. Corporate profits taxes are taxes on these corporate profits that are independent of any income taxes paid by individual shareholders. Corporate profits taxes are thus a portion of corporate profits that are not available for dividend payments to the household sector. Corporate profits taxes are profits earned, but not received.

  • Undistributed Corporate Profits: Undistributed corporate profits are another portion of the corporate profits that are not paid to the household sector. Commonly termed retained earnings, these are profits that could be paid out as dividends, but are usually retained to finance capital investment projects. Undistributed corporate profits are also profits earned, but not received.

Income Received But Not Earned

The three types of income received but not earned are Social Security payments, unemployment compensation payments, and welfare payments. These are three key transfer payments from the government sector to the household sector. The basic goal of transfer payments is to transfer a portion of the income earned by the factors of production (because they HAVE income) to other members of the household sector (who presumably NEED more income than they have).
  • Social Security Payments: Social Security payments are the other side of the Social Security system. These are payments made to qualifying elderly and disabled members of the household sector. Because the payments are NOT received as a result of any current productive activity they are income received, but not earned.

  • Unemployment Compensation Payments: Unemployment compensation payments are transfer payments from the government sector to unemployed members of the household sector. Unemployment compensation payments are NOT received as a result of any current productive activity. They are income received, but not earned.

  • Welfare Payments: Welfare payments are transfer payments from the government sector to lower income members of the household sector. Welfare payments are NOT received as a result of any current productive activity. They are income received, but not earned.

This equation illustrates how personal income (PI) can be derived by adjusting national income (NI):

PI=NI- Social Security Taxes - Corporate Profits Taxes
- Undistributed Corporate Profits + Social Security Payments
+ Unemployment Compensation Payments + Welfare Payments

<= PERSONAL INCOMEPERSONAL TAX AND NONTAX PAYMENTS =>


Recommended Citation:

PERSONAL INCOME AND NATIONAL INCOME, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 24, 2014].


Check Out These Related Terms...

     | income earned but not received | income received but not earned | transfer payments | corporate profits distribution | factor payments | net domestic product | national income | disposable income | gross domestic income | personal taxes and nontax payments |


Or For A Little Background...

     | personal income | gross domestic product, income | circular flow | gross domestic product | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |


And For Further Study...

     | disposable income and personal income | gross domestic product, expenditures | gross domestic product, ins and outs | gross domestic product, welfare | business cycles | gross national product | real gross domestic product | national income and gross domestic product | national income and net domestic product | inflation | unemployment |


Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis |


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