Available income

This article deals with a concept of economics; For the tax term freely disposable income, see net principle (tax law) #Subjective net principle .

Disposable income is a term used in national accounts . A distinction is made between the disposable income of the economy as a whole and the disposable income of private households. The disposable income of private households describes the part of the income that is available to private households for private consumption and private saving. The disposable income of the economy as a whole, on the other hand, denotes that part of the income of all economic units, i.e. H. is available to private households, the government sector and corporations for consumption and saving.

Term history

In 1949 Clarence L. Barber described which anomalies were not included in the previously used and poorly defined concept of disposable income. At this point in time, depreciation was only part of the overall savings picture of the gross savings rate and could not be differentiated from current income. This was especially true for agricultural income as well as income from the real estate industry and owner-occupied homes.

Gross rental income was allocated to consumer spending, but associated depreciation was excluded from disposable income. As a result, depreciation on agriculture and residential property together accounted for around a third of the total pre-war depreciation . Since many people saw this income as income , they saved less than would have been economically necessary.

Disposable income also included net changes in agricultural supplies . These were usually not available for spending . Many farmers sold their supplies, receiving the same income as from other sources of income. At the time, the accumulated inventory of a farm was not counted as income for expenses.

Years	${\displaystyle {\frac {\Delta C}{\Delta D1}}}$	${\displaystyle {\frac {\Delta C}{\Delta D2}}}$
1939-1940	85.5	88.4
1940-1941	83.9	71.1
1941-1942	41.0	61.3
1942-1943	80.5	38.3
1943-1944	65.6	59.6
1944-1945	169.3	125.2

The table above shows two important forms of saving. Savings from disposable income before and after the adjustment to the net changes in operating inventories are shown by visualizing the rise and fall of the marginal propensity to save and following the adjustment to the net changes in inventories during the war period. Life insurance investment income was split between the investor and the insurance company that withheld their share. The recording methods did not adequately represent the part of the gross national product that was suitable for the disposable income.

calculation

Newer calculation methods try to capture the factor as follows:

The following example illustrates the step-by-step procedure, with data from 2017 for Germany:

gross domestic product	€ 3,263.35 billion
+ Primary income from the rest of the world (income earned by residents abroad)	€ 192.37 billion
- primary income to the rest of the world (income generated domestically by foreigners)	- € 132.27 billion
= Gross national income	€ 3,323.46 billion
- Depreciation	- € 572.00 billion
= Net national income (at market prices)	€ 2,751.46 billion
+ Ongoing transfers from the rest of the world	€ 72.64 billion
- Ongoing transfers to the rest of the world	€ −118.60 billion
= Disposable income of the economy as a whole

If one adds the consumption of households, the state, investments and the foreign trade contribution, the gross domestic product arises, i.e. H. a measure of the macroeconomic added value within a period within the borders of a country (geographical definition). Since it is about the disposable income of residents, income earned by residents abroad must be added and the income generated by foreigners in Germany must be subtracted. In mathematical terms, this results in the gross national income at market prices.

The resources of the gross national income at market prices are not yet freely available to the residents, since replacement investments have to be made for the wear and tear of the means of production. After deducting this depreciation, you get the net national income (at market prices). In order to arrive at the disposable income of the economy as a whole, the net transfers from the rest of the world must be added to the net national income. These are flows that, in contrast to primary income, have no economic counter-performance such as B. Development aid or transfers to family members of foreigners who stayed at home.

The resulting size, the disposable income of the economy as a whole, is available to private households, the state and corporations for z. B. Consumption purposes available.

In contrast, the calculation of the disposable income of private households is based on the primary income of private households, i.e. H. the share of net national income to which private households are entitled. The following example illustrates the step-by-step procedure, with data from 2017 for Germany:

Primary income of private households	€ 2,273.557 billion
- Income and wealth taxes (e.g. income tax )	- € 324.035 billion
- Net social contributions (e.g. pension, health, unemployment, long-term care insurance)	- € 669.592 billion
+ Monetary social benefits	€ 563.519 billion
+ Other ongoing transfers	€ 31.764 billion
= disposable income of private households	1,875.21 billion euros

In order to calculate the disposable income of private households, the primary income, i.e. H. factor wages, income and wealth taxes are deducted first. These and the employers' social security contributions reduce private income and flow to the state as additional income. In addition, monetary social benefits from the state such as Hartz IV and other ongoing transfers such as non-life insurance benefits must be added .

The resulting disposable income of private households can then be used either for consumption purposes or for savings. Household final consumption expenditure is purchases for final consumption. The savings are then available for investment purposes.

Disposable income and the consumption decision

The consumption decisions of individuals depend on many different factors. A key determinant that is described in most textbooks within the framework of the IS-LM model is the freely disposable income. Consumption can then be described as a function of disposable income: ${\displaystyle C}$

${\displaystyle C=C(Y)}$

An increase in disposable income is usually accompanied by an increase in consumption. Because of the close relationship between these two quantities, which can be empirically observed in the aggregate, economists often provide for a linear specification:

${\displaystyle C=c_{0}+c_{1}\cdot Y}$

${\displaystyle c_{0}>0}$, autonomous consumption, says, for the sake of simplicity, how much would be consumed if the disposable income were zero. Then the equation would look like this:

${\displaystyle C=c_{0}}$

${\displaystyle c_{1}}$indicates the marginal propensity to consume, d. H. the additional consumption resulting from an additional unit of disposable income. That is, if the value were to assume that consumption would then increase . In Germany, the marginal propensity to consume is around 0.7. Both the linear relationship and the fact that only the disposable income of the respective period is relevant for the consumption decision are very simplistic assumptions. At the beginning of the financial crisis in the USA, for example, private consumption was already falling, although disposable income was still rising. The hypothesis of permanent income , for example, can contribute to the explanation . ${\displaystyle c_{1}}$ ${\displaystyle 0{,}5}$ ${\displaystyle 1\mathrm {\geneuronarrow} \cdot 0{,}5}$

Comparability problem

Despite inadequate statistical data, the aim is often to compare the prosperity of the countries on the basis of disposable income. The share of disposable income in gross domestic product would vary from country to country due to the location-based nature and differences in depreciation, transfer , primary income , government activities and foreign trade balances are not taken into account in this analysis. The economic role of the public sector is particularly important in countries with a high government quota such as Finland and Sweden . Disposable income is not a suitable measure to measure regional prosperity.

literature

• Teisman (founder), Klaus Birker (ed.): Handbook of practical business management . 4th edition. Cornelsen Verlag, Berlin 2004, ISBN 3-589-23682-5 , pp. 886-888.
• Jürgen Heubes: Macroeconomics (WiSo short textbooks ). Vahlen Verlag, Munich 1992, ISBN 3-8006-1614-9 , pp. 121-122.
• Rudolf Peto: Fundamentals of Macroeconomics . Verlag Oldenbourg, Munich 2001, ISBN 3-486-25500-2 , pp. 62-64.
• Peter Flaschel, Gangolf Groh, Christian Proñao Acosta: Keynesian Macroeconomics . Springer Verlag, Berlin 2008, ISBN 978-3-540-74858-8 , pp. 25-35.
• Gustav Dieckheuer: Macroeconomics. Theory and politics . 3rd edition Springer Verlag, Berlin 1998, ISBN 3-540-63849-0 , p. 7 ff.
• Rudiger Dornbusch , Stanley Fischer, Richard Startz: Macroeconomics . 8th edition. Verlag Oldenbourg, Munich 2003, ISBN 3-486-25713-7 , p. 255 and p. 263.
• Robert J. Barro : Macroeconomics . 2nd edition Transfer-Verlag, Regensburg 1989, ISBN 3-924956-60-X , p. 25 ff.
• Rolf Walter : Economic History. From mercantilism to the present . 4th edition Böhlau Verlag, Cologne 2003, ISBN 3-412-11803-6 , p. 14 ff.

Individual evidence

1. ^ Clarence L. Barber: The Concept of Disposable Income
2. ^ National Accounts: Income and Expenditure , 1938-1946
3. ^ Rolf Walter: Economic history: From mercantilism to the present. ISBN 3-412-11803-6 . Pp. 14-308
4. ↑ ^{a b} Federal Statistical Office of Germany National Accounts: An overview of important relationships , accessed on: April 19, 2018
5. ↑ Federal Statistical Office: Overview of the National Accounts.
6. ↑ Dornbusch - Fischer - Startz: Macroeconomics. P. 255 and 263, ISBN 3-486-25713-7 .
7. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 7th edition. Pearson, Hallbergmoos, ISBN 978-3-86894-308-5 , pp. 757 .
8. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 7th edition. Pearson, Hallbergmoos, ISBN 978-3-86894-308-5 , pp. 101 .
9. ↑ eurostat.com