Disposable Personal Income or DPI which denotes the amount of the income that an individual is going to save or spend after paying all the taxes. To gauge the overall condition and state of the economy at the macro level, DPI works as an important indicator that is closely monitored. In this article, we will understand what is disposable income and the disposable income formula along with examples and their importance in Economics.
What is Disposable Income?
It is the income of the individual that is left after paying all the taxes such as local taxes, state and federal taxes. You can answer this if you are asked what is personal disposable income? It is also called net pay. If we talk about the disposable income of the household, it includes all the income along with any kind of unemployment benefits as well as capital income.
It is considered as one of the important parameters which help in determining consumer spending. Besides this, it also works as an important parameter to determine and analyze the demand of the consumer. Disposable income does not only show the net income an individual gets but also tells about the products and services that can be bought by the consumers over a particular period at different prices. The purchase of goods and services depends on the disposable income an individual has which helps in determining the amount of disposable income that can be spent on the purchase of goods and services. Besides this, the disposable income also Indicates how much of the disposable income an individual is going to save after all of his expenditure.
The spending decisions are always taken on the basis of current income and thus effect can be seen on the national GDP in the form of fluctuations which occur due to disposable income and it can have an impact on the growth of the GDP as well. During the time of any economic crisis, the spending will reduce and that can lead to a direct impact on the growth of the economy as well.
Personal Income Formula
Disposable income can be calculated through the following formula:
Personal Disposable Income Formula = Personal Income – Personal Income Taxes
Disposable Personal Income = Personal Income - Personal Tax Liability
Let's understand how to find disposable income with the help of an example and formula:
Suppose the gross income of an individual is Rs. 5,00,000 and the direct tax is Rs. 30,000. Calculate the Disposable Income.
Gross Income = Rs. 5,00,000
Direct Tax = Rs. 30,000
Disposable Income = Personal Income – Personal Income Taxes
Disposable Income = 5,00,000 - 30,000
= Rs. 4,70,000/-
Real Disposable Income Formula
If we talk about Real disposable income, it is an important economic measure that helps in analysing the purchasing power of the people after paying all the taxes as well as getting benefits. It can be calculated from the following formula:
= Personal Income - taxes + benefits
Importance of Disposable Income Formula
We have read what is disposable income in economics and the personal income formula to calculate it. Let's go through the importance of this formula:
This is one of the important measures which helps in determining the start of the economy by the analysts while measuring the financial condition of the households as well.
It helps in measuring the spending as well as saving rates of the households.
It helps in deriving other economic indicators as well as statistical measures such as personal savings rates, discretionary income, MPC & MPS which refers to Marginal propensity to consume and Marginal propensity to save.
When the part of the income is used on the necessities, that is called discretionary income and when any economic crisis occurs, this discretionary income decreases and people's savings rate increases. So DPI is an important indicator in analysing such situations.
Thus, we can say that Disposable Income is the one that an individual earns and gets after payment of all the personal tax liability and other deductions and such income is used as spending or saving. The spending done on the necessities will be termed as discretionary income whereas Real Disposable Income is the one when income after payment of taxes is added with the benefits obtained by the person in the economic system. In this article, we have covered what is disposable income and personal income formula, its example and importance along with the formula of real disposable income which will help you in Economics.