Private Income: Meaning, Types and Steps (original) (raw)

Last Updated : 21 Jul, 2023

Private income can be defined as the income accruing to the private sector both from domestic and international sources.

Types of Private Income

The private sector (Private firms Households) receives both earned income (factor income) and unearned income (transfer income). It consists of two different types of income:

1. Factor Income (Earned Income):

For the private sector, there are two sources of factor income:

• Income from domestic output accruing to the private sector that is earned within the domestic territory.
• Income earned from sources outside of the country is usually known as net factor income from abroad.

2. Transfer Income (Unearned Income):

There are two forms of transfer income:

• Income received within the country. It involves an interest in the national debt as well as current transfers from the government.
• Income received outside the country. It includes net current transfers from the rest of the world.

Transfer incomes under Private Income

(i) Interest on National Debt:

To cover rising expenditures, the government may borrow funds from the people (by issuing bonds such as National Saving Certificates, Saving Bonds, and so on). The government generally uses such debts for personal consumption. As a result, interest on these debts is considered transfer income for private enterprises.

(ii) Current transfers from the Government:

This category comprises any transfer payments received from the government, such as subsidies, unemployment benefits, and scholarships. Such transfers are always positive because they are one-sided, i.e. they flow from the government to the private sector.

(iii) Net Current transfers from the rest of the world:

It includes net gifts and remittances received from abroad. It is positive when transfers received from abroad are greater than transfers paid abroad. However, it is negative if transfers paid abroad are greater than those received.

Steps for Calculating Private Income

The steps for calculating Private Income are as follows:

Private Income from Domestic Concept (say, GDPMP)

Step 1: Calculate Domestic Income (NDPFC)

NDPFC= GDPMP – Depreciation – Net Indirect Taxes.

Step 2: Calculate Income from Domestic Product Accruing to Private Sector
Income from Domestic Product Accruing to Private Sector= NDPFC – Income from Property and Entrepreneurship accruing to Government Administrative Departments – Savings of Non-departmental Enterprises.

Step 3: Calculate Private Income

Private Income= Income from Domestic Product Accruing to the Private Sector + Net Factor Income from Abroad + National Debt Interest + Current Transfers from Government + Net Current Transfers from the rest of the world.

Private Income from National Concept (say, GNPMP)

Step 1: Calculate National Income (NNPFC)

NNPFC = GNPMP – Depreciation – Net Indirect Taxes

Step 2: Calculate Income from National Product Accruing to Private Sector

Income from National Product Accruing to Private Sector= NNPFC – Income from Property and Entrepreneurship accruing to Government Administrative Departments – Savings of Non-departmental Enterprises.

Step 3: Calculate Private Income

Private Income= Income from National Product Accruing to the Private Sector + National Debt Interest + Current Transfers from Government + Net Current Transfers from the rest of the world.

Difference between Private Income and National Income

Difference between Private Income and Domestic Product accruing to Private Sector