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What Is National Income in Economics?

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Helna is a postgraduate in commerce who is working as a manager. She loves sharing informative information with her readers.

National Income


What is National Income in Economics?

National Income is the combined economic activity (production of finished goods and services calculated in monetary value) within the economic territory of a country by its residents during the year of accounting. Put differently, the National Income of a country is the Net National Product at factor cost.

From the above definition of national income, you may notice some terms and the concept behind the terms. Let us discuss the following terms and concepts.

  1. Economic Territory of a country
  2. Resident of a country
  3. Intermediate product and the final product
  4. Concept of Value-added and the value of finished goods
  5. Concept of Domestic Product
  6. Concept of National Product

To understand or determine the national Income we need to understand the meaning of the economic territory of a country as well as the meaning of residents of a country.

What Is the Meaning of the Economic Territory of a Country?

Economic (domestic) Territory

Economic territory or "domestic territory" of a country does not limit to the geographical territory of a country. Even the geographical territory cannot completely come under the economic territory of a country. You may be feeling strange about this statement. I will explain to you with some examples. The economic activity of a country does not limit to its geographical territory. For example, one of the Indian citizens may go to the USA to work for a few months. Whatever he gains after his expenses in the USA, he brought back to his home country India. In such a cause the geographical territory of the USA becomes the Economic territory of India. It can happen in the opposite direction as well. An American comes to India for work for 3 months, and he returns to his home country with the money earned from India. Therefore, Indian soil becomes the economic territory of America.

To put it concisely, even the economic activity of a country may include the geographical territory of other countries. For understanding the national income, we need to understand the concept of Economical national territory of a country which is may spread all over the world.

Embassies and other government offices situated in other countries come under the Economic (domestic) territory of a country.

India's economic territory includes all the Indian Embassies and government offices located in foreign countries.

Simultaneously, the American embassy situated in India will become the domestic economic territory of America. Therefore, the economic territory of India excludes foreign embassies and international organizations and similar foreign offices located in India. (At the same time, the Income of an Indian employee who works inside the American embassy located in India can be treated as the National income of India. To understand it, you need to study the meaning of a resident.)

Offices of International organizations like the World Health Organization (WHO) situated inside the geographical area of India are called International territory.

It is understandable to you now that the geographical territory of a country is not the same as the economical territory of a country. The concept of economical territory is significant to determine the National Income of a country. The combined income of a country during the year from its economic territory is called the National income of that country.

Resident of a country

What is the meaning of "a Resident of a country" in economics?

The term citizen is different from a resident. A citizen remains a citizen of a particular country. At the same time, a citizen can go to another country and stay there for a short period or a long period. For example, an Indian citizen can go to Kuwait and stay there for more than a year and work there. In such a cause he is a resident of Kuwait at the same time he is a citizen of India.

A person who is staying in a country for a year or more can be considered as a resident of that country. The monetary value of products or services produced by that person can be treated as part of the national income of the country of his residence.

An institution or a firm or an individual whose center of economic interest lies in a country is treated as the resident of that country. At the same time, they could be a citizen of another country.

For example, an American living in India and performs economic activities like an investment, production, and consumption is treated as an Indian resident. A non-Resident Indian (NRI) is a person whose economic activities are in another country even though he is a citizen of India. You may know many Indians who are working abroad and living there. For example, Indian citizens living in Kuwait, Saudi Arabia, the United States of America, Canada, Dubai, England, and South Africa are treated as Non-Resident Indians (NRIs). Although they are a citizen of India, they are treated as a resident of the respective country they live. In short, a citizen of a country may or may not be the resident of that country.

You may be wondering whether the money transferred to the home country by the NRI's can be treated as National Income of India? If it is a factor payment, it can be treated as the national income of the country. If it is a transfer payment, you cannot treat it as the national income of the country. Transfer payments help to maintain the foreign exchange of the country.

Factor Payment: Factor payment is a payment made in place of providing goods and services. A worker receives the wages is the factor payment because he worked for it. There are productions/efforts in it. Rent for land or building used, interest on capital, wages, salary, commission, profit, etc. are some of the examples of factor payment.

Transfer payment: If there is no obligation involved to deliver service or goods in return for the payments is called transfer payment. Examples are donations, old age pension, unemployment benefit, scholarship, etc. These payments do not involve any obligation to deliver goods or services. Therefore such transactions are called transfer payments. These payments will not consider as an income of the nation while calculating national income.

National income can be determined in the following variants:

Gross National Product (GNP) - in factor cost
Net National Product (NNP) - in factor cost
Gross Domestic Product (GDP) - in factor cost
Net Domestic Product (NDP) - in factor cost

Gross National Product (GNP) - in Market Price
Net National Product (NNP) - in Market Price
Gross Domestic Product (GDP) - in Market Price
Net Domestic Product (NDP) - in Market Price

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2012 Helna


manvi on June 09, 2016:

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Proved to be extremely helpful..... thanks

vikas on June 14, 2015:


mary sonia on March 03, 2015:

wow... you helping us in economics

sravani on December 24, 2014:

awesome an dpractical explanation

cheetah786 on September 25, 2012:

your knowlesge about economics are impressive.. thanks for sharing in hubpages community..

Bruce Clark on June 09, 2012:

You must be reading a lot on economics related articles. Great ideas you have come up here. Voted up.

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