Question

How the changes in personal income of households affect GDP?

Answer 1

Changes in personal income and GDP are positively related. Personal income is the income earned by an individual through wages, interest ,profit and income earned through other ventures. Rise in personal income means increase in disposable income which will either spend on consumption or saving. Increase in both consumption and saving will give a boost to GDP growth. Increase in consumption increases the marginal propensity to consume which thereby increases GDP through multiplier effect. Increase in saving is converted to investment and thus leads to increase in GDP. Therefore, increase in personal income increases the economic activity and thus increases GDP.