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Which of the following are excluded from the National Income to calculate Personal Income?
  1. Corporate Tax
  2. Personal Tax payments
  3. Transfer payments to the households from the Government
  4. Undistributed profits
Select the correct answer using the code given below.
  • a)
    1 and 4 only
  • b)
    1, 3 and 4 only
  • c)
    2 and 3 only
  • d)
    2, 3 and 4 only 
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Which of the following are excluded from the National Income to calcul...
  • We can subdivide the National Income into smaller categories. The part of NI which is received by households is called Personal Income (PI). It is calculated as follows.
  • First, out of NI, which is earned by the firms and government enterprises, a part of the 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.
  • Similarly, 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.
  • On the other hand, 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 the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.
  • Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
  • However, even PI is not the income over which the households have complete say as they have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. So Personal Income includes tax payments.
    Hence option (a) is the correct answer.
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Which of the following are excluded from the National Income to calculate Personal Income? Corporate Tax Personal Tax payments Transfer payments to the households from the Government Undistributed profitsSelect the correct answer using the code given below.a)1 and 4 onlyb)1, 3 and 4 onlyc)2 and 3 onlyd)2, 3 and 4 onlyCorrect answer is option 'A'. Can you explain this answer?
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