Disposable income

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Definition

The disposable income of an individual or household, measured in the context of a specific time period, is defined as:

Total income in the time period (of the individual or all persons in the household) - Taxes due for that time period

Disposable income is not to be confused with discretionary income, which is the part of disposable income left over after some basic expenses have been met.

Disposable income can either be spent (on consumption) or saved. Note that spent includes consumption, gifts, donations to charity, etc. and saved includes money savings and investments. The fractions of disposable income allocated to consumption and saving are termed the average propensity to consume (APC) and average propensity to save (APS) respectively, with APC + APS = 1. The fractions, at the margin, of disposable income allocated to consumption and saving are termed the marginal propensity to consume (MPC) and marginal propensity to save (MPS) respectively, with MPC + MPS = 1.

Short run versus long run

We can distinguish between short run disposable income and long run disposable income (also called permanent income) which average the short run disposable income over a longer period of time.