income classification

In the study of national income, income classification refers to the various ways earnings are measured to understand how much money actually reaches individuals, households, and the nation as a whole. These measures range from the total wealth of a country to the specific amount a person has available to spend.

Based on the sources, here are the primary classifications of income:

1. Personal Income (PI)

Personal Income is the total income received by the individuals and households of a country from all sources before the payment of direct taxes in a given year

• How it differs from National Income: It includes transfer payments (like pensions or scholarships) which are not part of National Income because they are not earned through current production.
• Calculation: It is derived by taking the National Income, adding transfer payments, and subtracting items that individuals do not actually receive, such as undistributed corporate profits and social security contributions.

2. Disposable Income (DI)

Also known as Disposable Personal Income, this is the portion of income that individuals actually have the “disposal” of for their own needs.

• The Spending Buffer: It is the amount available for households for consumption and saving after all direct taxes (like income tax) have been paid.
• Formula: $\text{Disposable Income} = \text{Personal Income} - \text{Direct Tax}$

3. Nominal vs. Real Income

Economists classify income based on whether it accounts for changes in the cost of living:

• Nominal Income: This is income expressed in terms of current market prices; it does not account for inflation.
• Real Income: This refers to the actual buying power of nominal income. It is adjusted for inflation by using a “Base Year” to show how much a person can truly afford compared to a previous period.

4. Per Capita Income

This is a measure of the average income per head of the population in a country.

• Calculation: It is found by dividing the total National Income by the total population.
• Usage: It is often used to compare the standard of living between different countries.

5. High-Level National Classifications

The sources also identify broader measures used to classify the income of the entire nation:

• Gross National Income (GNI): The total amount of money earned by a nation’s people and businesses, including the GDP plus income received from overseas.
• Net National Income (NNI): This is the GNI after subtracting depreciation (the loss in value of fixed assets like buildings and machinery over time). In formal economic terms, National Income is equal to NNP at Factor Cost

Summary Table of Income Measures