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What is National income in Economics?

Updated on November 11, 2013

National Income

What is National income in Economics?

National Income is the total 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. In other words 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 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 economic territory of a countryas well as the meaning of residents of a country.

What is the meaning of 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 fully come under the economic territory of a country. You may be feeling strange about this statement. I will explain you with some examples. Economic activity of a country does not limit to its geographical territory. For example, one of the Indian citizens may go to USA for work for a few months. Whatever he earns after his expenses in USA, he brought back to his home country India. In such a cause the geographical territory of USA becomes the Economic territory of India. It can happen on 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. So, Indian soil becomes the economic territory of America.

In short, even the economic activity of a country may include the geographical territory of other country. 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.

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

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

It is clear for you now that the geographical territory of a country is not same as the economical territory of a country. The concept of economical territory is important to determine the National Income of a country. The total income of a country during the year from its economic territory is called 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 is 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 treated as a resident of that country. Monetary value of products or services produced by that person can be treated as the part of 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 are treated as the resident of that country. At the same time they could be citizen of another country.

For example an American living in India and performs the economic activities like investment, production and consumption is treated as an Indian resident. 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, United States of America, Canada, Dubai, England, and South Africa are treated as Non Resident Indians (NRIs). Although they are citizen of India, they are treated as 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 foreign exchange of the country.

Factor Payment: Factor payment is a payment made in lieu of providing goods and services. A worker gets the wages is the factor payment because he worked for it. There are production/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 of the payments is called transfer payment. Examples are: donation, old age pension, unemployment benefit, scholarship etc. These payments do not involve any obligation to deliver goods or service. So 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


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      manvi 19 months ago

      Proved to be extremely helpful..... thanks

    • profile image

      vikas 2 years ago


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      mary sonia 2 years ago

      wow... you helping us in economics

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      sravani 3 years ago

      awesome an dpractical explanation

    • cheetah786 profile image

      cheetah786 5 years ago

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

    • Bruce Clark profile image

      Bruce Clark 5 years ago

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