The correct option is 1 and 3 only.
Explanation
Personal Income (PI) is a macroeconomic aggregate that measures the income actually received by individuals and households from all sources, distinguishing it from National Income (NI), which measures income earned by factors of production.
- Statement 1 is Correct: Personal Income is defined as the part of National Income that is actually received by households. While National Income represents the total income earned, not all of it reaches households (e.g., corporate taxes), and households receive some income that is not earned through production (e.g., transfer payments).
- Statement 2 is Incorrect: To calculate Personal Income from National Income, undistributed profits (retained earnings) and corporate taxes are subtracted, not added. These are parts of the profit earned by firms that are either kept for future expansion or paid to the government, meaning they are not distributed to households.
- Statement 3 is Correct: Transfer payments from the government (such as pensions, scholarships, and unemployment allowances) and firms are added to National Income to arrive at Personal Income. These payments are receipts for households but are excluded from National Income because they do not correspond to the production of any goods or services.
Key Takeaway: The relationship is defined by the formula:
Personal Income = National Income - Undistributed Profits - Net Interest payments made by households - Corporate Tax + Transfer Payments.