Personal income refers to all income collectively received by all individuals or households in a country. Personal income includes compensation from a number of sources including salaries, wages, and bonuses received from employment or self-employment; dividends and distributions received from investments; rental receipts from real estate investments and profit-sharing from businesses.
Breaking Down Personal Income
The term "personal income" is sometimes used to refer to the total compensation received by an individual. This is more aptly referred to as individual income. In most jurisdictions, personal income, also called gross income, above a certain exemption threshold is subject to taxation.
Significance of Personal Income
Personal income has a large effect on consumer consumption. Since consumer spending drives much of the economy, national statistical organizations, economists and analysts track personal income on a quarterly or annual basis.
For example, in the United States, the Bureau of Economic Analysis (BEA) tracks personal income statistics each month and compares it to numbers from the previous month. The agency also breaks out the numbers into categories such as personal income earned through employment wages, rental income, farming, and sole proprietorship. This allows the agency to make analyses about how earning trends are changing.
Personal Income Trends
Personal income tends to display a rising trend during periods of economic expansion, and show a stagnant or slightly declining trend during recessionary times. Since the 1980s, rapid economic growth in economies such as China, India, and Brazil has spurred substantial increases in personal incomes for millions of their citizens.
Personal Income vs. Disposable Personal Income
Disposable personal income (DPI) refers to the amount of money a population has left after taxes have been paid. It differs from personal income in that it takes taxes into account.
However, it's important to note that contributions to government social insurance are not taken into account when calculating personal income. As a result, only income taxes are removed from the personal income figure when calculating disposable personal income.
Personal Income vs. Personal Consumption Expenditures
Personal income often is compared to personal consumption expenditures (PCE). PCE measures the changes in the price of consumer goods and services. By taking these changes into account, analysts can ascertain how changes in personal income truly affect spending. To illustrate, if personal income increases significantly one month, and PCE also increases, consumers collectively may have more cash in their pockets, but they may have to spend more money on basic goods and services.