Personal Income: Definition, Components, and Economic Role

What is personal income?

Personal income is the total income received by individuals or households in a country. It includes compensation from employment and self-employment as well as nonlabor receipts such as:

• Wages, salaries, bonuses
• Self-employment and sole‑proprietor earnings
• Dividends and investment distributions
• Interest and other investment income
• Rental receipts and profit‑sharing

Personal income is generally measured before income taxes and is a key indicator of how much households earn.

Key points

• Personal income measures earnings received by individuals or households before taxes.
• Disposable personal income (DPI) equals personal income minus personal income taxes; DPI represents money available to spend, save, or invest.
• Changes in personal income influence consumer spending, which is a major driver of economic activity.
• Statistical agencies (for example, the U.S. Bureau of Economic Analysis) track personal income regularly and break it down by source to analyze trends.

Personal income vs. disposable income

Disposable personal income (DPI) is the after‑tax amount households have available. Only personal income taxes are subtracted to compute DPI. DPI is more directly tied to household behavior because it reflects the funds people can actually use for consumption and saving.

How personal income affects consumer spending

Analysts compare personal income with personal consumption expenditures (PCEs). PCEs measure spending on consumer goods and services and incorporate changes in prices. Together these measures show whether income gains translate into higher real consumption or are offset by rising prices.

Example:
* If personal income rises but PCE prices rise faster, households may have less real purchasing power despite higher nominal income.

Economic significance

• Personal income typically increases during economic expansions and stagnates or falls during recessions.
• Tracking income by source (wages, rentals, dividends, etc.) helps identify structural changes in the economy and in household welfare.
• Rising personal income can boost demand for goods and services, supporting growth; declining income tends to suppress spending and slow growth.

Personal income vs. gross national income (GNI)

• Personal income focuses on earnings received by individuals and households.
• Gross national income (GNI) measures the total income earned by a nation’s residents and businesses, including income from abroad. GNI is a broader national aggregate than personal income.

How to calculate personal and disposable income

• Personal income: Sum all incomes received by individuals or households across the economy (labor compensation, dividends, interest, rental income, proprietor income, transfer payments, etc.).
• Disposable personal income: Subtract personal income taxes from personal income.

Frequently asked questions

Is personal income measured before or after taxes?
* Before. Personal income is a pre‑tax measure; disposable personal income is the after‑tax measure.

Why track personal income?
* It helps assess household earning power, anticipate consumer spending trends, and understand the distribution of income across sources—information used by policymakers and economists.

Sources

U.S. Bureau of Economic Analysis; Internal Revenue Service; The World Bank.