Real Per-Capita Disposable Personal Income

Connections


Connections to Key Topics with Additional Resources

Topic Connections and Additional Resources
Supply and Demand

When real per-capita income rises, perhaps due to an increase in productivity, then consumption spending will usually increase as well. The implication is that for normal and luxury goods, such as vacation travel and restaurant meals, a rise in real per-capita income will cause demand to increase.

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Utility and Consumer Choice

A rise in real per-capita income implies that per-capita income rises faster than prices. If preferences do not change, then a rise in real per-capita income will increase consumption. Because of diminishing marginal utility, an increase in consumption will drive down the marginal utility per dollar spent on the last unit consumed.

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Utility and Consumer Choice

In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax cuts would help boost the economy, which was in recession at the time. The concept of utility and consumer choice is useful in understanding how consumer spending on specific goods and services is affected by an increase in disposable income. The income effect states that an increase in disposable income will result in an increase in the quantity of normal and luxury goods and services purchased. An increase in the quantity of a particular good or service consumed will increase total utility, but the law of diminishing marginal utility tells us that marginal utility falls as the quantity of a particular good or service consumed increases.

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Income Distribution and Poverty

Real per-capita income is an average measure of a person's inflation-adjusted income in a particular country. Since no country has a perfectly equal distribution of income, real per-capita income always overstates material living standards for the poorest in society. Policies that promote growth in real per-capita income do not always reach the poorest in society. In fact, the disparity between the world's richest and poorest people has been rising.

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Productivity and Growth

Gains in real per-capita income are generated by improvements in productivity. Productivity is in turn linked to business investment. Countries with relatively strong business investment tend to have more rapid gains in real per-capita income.

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Output, Income, and the Price Level

Real per-capita disposable personal income is derived from national income accounts. Total personal income in a country is equal to its GDP minus depreciation and indirect business taxes. If we subtract personal taxes and inflation, and divide by population, we then have real per-capita disposable personal income.

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Aggregate Demand/ Aggregate Supply

An increase in real per-capita income, perhaps due to a rise in productivity, will cause consumption spending and aggregate expenditures to also increase. An increase in aggregate expenditures will cause the aggregate demand curve to shift outwards.

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Taxes, Spending, and Deficits

Disposable personal income is the portion of personal income that is available for consumption spending or saving after personal taxes are taken out. Thus real per-capita disposable personal income can be increased (at least in the short run) by a cut in the personal tax rate.

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Developing and Transitional Economies Developing and transitional economies have low levels of real per-capita income compared to the U.S., Japan, and Western European countries. Many nations continue to transition to industrial economies from those that rely on subsistence agriculture and raw natural resource commodity exports.

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Elasticity In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax< cuts would help boost the economy, which was in recession at the time. The concept of income elasticity of demand is useful in understanding how consumer spending on specific goods and services is affected by an increase in disposable income. An increase in disposable income will result in an increase in the quantity of normal and luxury goods and services purchased. If indeed consumers respond to the increase in disposable income by increasing their spending on goods and services, the tax cut will have a stimulative effect on the macroeconomy.
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Government and the Economy In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax cuts would help boost the economy, which was in recession at the time. This is an example of expansionary fiscal policy. Cutting taxes increases disposable personal income, and if consumers respond to this increase in disposable income by increasing their spending, then tax cuts can help move the economy out of recession. This also provides an important example of the interaction of government and the economy.

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Equilibrium In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax cuts would help boost the economy, which was in recession at the time. For normal goods, an increase in disposable income is expected to cause an increase in demand. If individual product markets were previously in equilibrium, then the increase in demand caused by the tax cut is expected to result in a new equilibrium in individual product markets. This new equilibrium will feature a larger equilibrium quantity and price.

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