What is National Income?

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National Income, is a measure of the value of production activity of a country.

This definition raises further questions : –

  • What defines a country ?
  • Who are the citizens of a country ?

The answers to these two questions leads us to the concept of Economic Territory or Domestic Territory and Resident.

Economic Territory:

Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.

Only those parts of the country are included here where the government of that particular country,  enjoys absolute freedom in it’s operation. For these reasons the Embassy of India in Germany is included in Economic Territory of India and Embassy of Germany in India is included in Economic Territory of Germany.

Scope : –

The above definition covers : –

  • Political frontiers including territorial waters and air space.
  • Embassies, consulates, military bases, etc located abroad,but excluding those located within the political frontiers.
  • Ships, aircrafts etc, operated by the residents between two or more countries. Eg Revenue generated from the operations of Air India will be calculated in India’s National Income.
  • Fishing vessels, oil and natural gas rigs, etc operated by the residents in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction.

Normal Resident:

A resident, whether a person or an institution, is one whose centre of economic interest lies in the economic territory of the country in which he lives.
Let’s understand this with help of an example: Mark, an American citizen has been living in India for past 5 years and he works in Mumbai. His earnings will be calculated as part of India’s National Income.

Exceptions : –

There are certain exceptions to this rule as under  : –

  • Diplomats and officials of Foreign Embassy.
  • Commercial travellers, tourists, students etc
  • People working in international Organisations like IMF, WHO, UNICEF etc are treated as normal residents of the country to which they belong.

Now we come to other definitions which are important while calculating National Income.

Factor Income:

It is the income which arises for rendering factor services. Eg Wages, Salary, Rent etc. It arises because it is the payment against the services provided. It is always  included while calculating National Income.

Transfer Income:

It is the income which just gets transferred and against which no productive services had been provided. Eg Lottery winnings, Sponsorship, Shyam living in USA sends money to his family living in New Delhi etc. These incomes are not included while calculating National Income.

Final Goods:

Final goods are those goods which are used for final consumption. It is included while calculating National Income.

Intermediate Goods:

Intermediate goods are those goods and services which are used as raw material for producing further goods and services. It should be used in the same year.

Whether a good is a Final good or Intermediate good it depends on the ‘Nature of the use of the product’. Eg when baker buys sugar it is a intermediate good as she will use it for the purpose of baking. But when an household buys sugar, it is a final good as it for final consumption.

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