Difference Between National Income and Disposable Income

Evaluating economic success typically relies on two key measures: national income and disposable income. The primary disparity between disposable income and national income lies in the fact that the latter represents the net income available to a household or individual after deduction of income taxes, which can be used for saving, investing, and spending. National income encompasses the total value of a nation's production, encompassing all goods and services generated within a specific year. Understanding the distinctions between these two terms is crucial due to their significant differences in nature.

What is National Income?

The complete output of a country, comprising all goods and services produced within a specific timeframe, is termed as its national income. Assessing a nation's economic value often involves examining its national income and expenditure, which are akin to scrutinizing its overall production.

How to Calculate the National Income

The calculation of national income relies on three specified methodologies provided below.

Income Method

The determination of national income involves the application of three distinct methodologies. The first method calculates the total earnings derived from the annual production of goods and services within the economy. This approach encompasses interest payments to capital providers, profits generated by businesses, wages and salaries earned through employment and self-employment, and rental income from landowners.

Output Method

The output technique consolidates the value of all goods and services produced across the primary, secondary, and tertiary sectors of the economy, spanning industries, services, and agriculture. Key indicators for evaluating the economic performance of a nation or region and facilitating international comparisons include gross domestic product (GDP) and gross national product (GNP).

Gross Domestic Product (GDP)

The monetary value of all goods and services produced within a specific period, whether quarterly or annually, constitutes a period's gross domestic product (GDP). GDP quantifies output based on where the production takes place.

Utilizing data sourced from the International Monetary Fund, the subsequent chart illustrates the top GDPs of countries or regions worldwide in the year 2016.

Gross National Product (GNP)

The total market value of goods and services produced by a nation's populace on a quarterly or annual basis is termed as its gross national product (GNP). Unlike GDP, GNP reflects production distributed according to the location of ownership.

Expenditure Method

Employing the expenditure method involves aggregating all expenditures made by households and businesses on goods and services.

What is Disposable Income?

Disposable income refers to the net income available to an individual or family after deduction of income taxes, which can be utilized for spending, investing, and saving purposes. It is computed by subtracting income taxes from the total income.

For instance, if a household earns $350,000 annually and faces a tax rate of 30%, their disposable income would amount to $245,000 ($350,000 - ($350,000 * 30%)). This signifies that $245,000 is accessible to the household for savings, investments, and consumption.

Individuals and households allocate some of their income towards savings while fulfilling essential needs such as food, shelter, transportation, healthcare, and recreation. Additionally, they partake in investment activities with the aim of generating returns.

The computation of national income through the mentioned methods does not incorporate the influence of taxes. To calculate the national disposable income of a nation or region, one must aggregate the disposable income of every individual and family. However, comparing disposable income across nations based on this figure is not feasible as it represents an absolute measure. Hence, the determination of "disposable income per capita" for a nation involves summing up the total income of all citizens, subtracting taxes, and then dividing the resultant value by the population of the nation.

The Organization for Economic Cooperation and Development (OECD) has created a visual representation showcasing the per capita disposable income of the top five nations in the year 2016.

Difference Between National Income and Disposable Income

Conclusion

Disposable income denotes the net income available to individuals and families, whereas national income quantifies the overall value of goods and services. This presents a clear differentiation between the two metrics.

Given the importance of national income and disposable income as economic gauges, nations consistently strive to elevate or sustain them at favourable levels. In a nation with a high national income, disposable income typically remains elevated.