What is disposable income?

Disposable income refers to the amount of money that households have available for spending and saving after all taxes have been deducted. It is essentially the net income that individuals can use to purchase goods and services, invest, or save. This definition captures the real purchasing power of households, as it accounts for the mandatory deductions that affect the cash on hand for personal use. Understanding disposable income is crucial in macroeconomics since it directly influences consumer spending, which is a significant component of aggregate demand in an economy.