The correct option is Retained earnings
Explanation
In National Income Accounting, a distinction is made between the income accruing to the entire private sector (which includes both private enterprises and households) and the income actually received by households (Personal Income). The transition from Private Income to Personal Income involves deducting amounts that are earned by the private sector but not distributed to households.Formulaic Relationship:
The standard relationship is defined as:
- Personal Income = Private Income - Corporate Tax - Retained Earnings (Undistributed Profits).
Detailed Analysis:
- Retained earnings Retained earnings (Correct): Private Income includes the total profits of private corporations. However, corporations do not distribute their entire profit to shareholders (households). A portion is kept as Retained Earnings (or Undistributed Profits) for future expansion or reserves. While this is part of the Private Sector's income, it is not received by households, and thus is excluded from Personal Income.
- Corporate Tax Corporate Tax: Like Retained Earnings, Corporate Tax is also deducted from Private Income to arrive at Personal Income (since it is paid to the government and not received by households). However, in the context of distinguishing "earnings" that remain within the private sector versus those distributed, Retained Earnings is the primary component of private wealth that is not personal income. (Note: In a multiple-select context, both Corporate Tax and Retained earnings are deductions; however, Retained Earnings is the distinct economic saving of the corporate sector).
- Personal Tax Payments Personal Tax Payments: These are included in Personal Income. Personal Taxes are subtracted from Personal Income to arrive at Personal Disposable Income.
- Net Factor Income from Abroad Net Factor Income from Abroad (NFIA): This is a component of National Income and is included in both Private Income and Personal Income (to the extent it accrues to the private sector).
Key Takeaway:
Personal Income is the income actually received by households. It is derived from Private Income by subtracting Corporate Taxes and Retained Earnings (Undistributed Profits).