Difference between Private Income and Personal Income

This article will help you to learn about the difference between private income and personal income.

Difference between Private Income and Personal Income

Difference – Private Income:

“Private income is the total of factor incomes and transfer incomes received from all sources by private sector (private enterprise and households) within and outside the country.”

It also includes net factor income from abroad. Private Sector consists of private enterprises and households [factor owners). Thus, private income consists of not only factor incomes earned within the domestic territory and abroad but also all current transfers from government and rest of the world. In tills way it is the sum of earned incomes and transfer incomes received by private sector.

Thus, the concept of private income is broader than that of personal income because private income consists of personal income + profit tax + undistributed profit. Again, it should be kept in mind that conventionally ‘net factor income from abroad’ is allocated to private sector and not to government sector.

Put in Symbols:

Private Income = Income from domestic product accruing to private sector + Net factor income from abroad + All types of transfer incomes

= National Income – Income from domestic product accruing to Government Sector + Transfer incomes

= Personal income + corporate tax + Undistributed profit

Three main forms of transfer income used in numerical are:

(i) Interest on national debt (ii) current transfers from government administrative departments and (iii) net current transfers from rest of the world. Mind, interest on national debt which is paid by the government on loans taken from public is treated as transfer income became government loans are traditionally treated for consumption and not for production purposes. For the same reason, interest paid by consumers is also treated as transfer income and not included in national income.

Difference between Private Income and Private Sector Income:

Both are different. Private sector income includes only factor income earned by private sector within domestic territory whereas private income includes private sector income, NFIA and all current transfers from within and outside the country. Thus, private income is a national and broader concept whereas income from domestic product accruing to private sector is a domestic concept.

Symbolically:

Private income = Private sector income + NFIA + All transfer incomes

Difference – Personal Income:

“Personal income is the sum of earned income and transfer income received by persons (households) from all sources within and outside the country. The point to be noted here is that personal income includes not only factor incomes which are earned from productive services but also transfer incomes (or payments) which are received without rendering any productive service. Thus, personal income is the sum of earned incomes and current transfer incomes. In other words, it is a receipt concept as compared to national income which is an earning concept.

It may be pointed out that national income is not the sum total of personal incomes since the former includes only earned incomes whereas the latter includes earned incomes as well as transfer incomes. Again, personal income is different from private income because o components of private income namely corporate tax and undistributed profit of corporate enterprise are not included in personal income.

The reason is that corporate tax goes to the government and undistributed profit is retained by the company, i.e., these two items are not Received by households (Refer Section 6.17(b) items 4 and 6).

Put in the form of Equations:

Personal income = Private income – Corporate tax – Undistributed profit

= National income – Income of govt. (public) sector – Corporate tax – Undistributed profit + All types of transfer incomes

= Domestic income – Income from domestic product accruing to govt. sector – Corporate tax – Undistributed profit + NFIA + All types of transfer incomes

The concept of Personal Income is helpful in knowing the potential purchasing power of the households. It is used to measure consumers’ welfare.