The part of National Income which is received by households is called as Personal Income Which of th...........

Economic Affairs Growth and Indicators

The part of National Income which is received by households is called as Personal Income. Which of the following components of National Income are not included in Personal Income?

1. Undistributed profits of government enterprises.

2. Corporate Tax.

3. Net Interest Payments made by households.

4. Transfer payments to the households from the government and firms.

Select the correct answer using the code given below.

1 ,2 and 4 only

1 and 2 only

1,2 and 3

All of the above

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Explanation:

The part of National Income which is received by households is called as Personal Income.

Personal Income (PI) = National Income (NI) - Undistributed profits - Net interest payments made by households - Corporate tax + Transfer payments to the households from the government and firms.
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.
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.
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.