Meaning of National Income

• • It is the sum total of all the factor income received by factors of production ie land, labour, capital and enterprise, in a financial year.
  • It can also be said as the total income earned by normal residents of a country in an accounting or financial year.

• • It is measured by an indicator known as Gross Domestic Product (GDP).
  • There are various other aggregates which measure national income which are derivatives of one another.
  • It is a flow variable.

Who is considered as ‘Normal Resident’ of a country?

• • Normal resident of a country refers to the one who ordinally resides in the country and whose centre of economic interest also lies in that country.
  • They include both, individuals and institutions like firms.

Centre of economic interest means:

1. The resident lives within the domestic territory of any country.
2. The resident carries out basic economic activities of earnings, spending and accumulation of wealth the domestic territory of that country.
3. Residing in the country for more than 182 days in a financial year. (Note: There are other criteria also to define residency of an entity but from the perspective of understanding the basic concept of residency, this criterion of 182 days is very important)

Note: A resident of any country may or may not be the citizen of that country. Thus, residency is an economic concept whereas, citizenship is a political concept.

GDP: Gross domestic product (GDP) is the total monetary or market value of all the final goods and services produced within a country’s domestic territory in an accounting year.

Important concepts regarding national income

1. Factor income vs Transfer income
2. Factor income: It is the income earned by each factor of production for services rendered in an economic activity. Rent, Wages, Interest and Profits are the factor incomes for land, labour, capital and entrepreneurship.

1. Transfer income: It is the income received by an individual without rendering any productive service in return. E.g. – Old age pension, pocket money, gifts, scholarship, etc.

Note: Remittance sent by a worker working abroad to his/her family in the domestic country is considered as transfer payments as part of the current account of the balance of payment for the nation.

2. Stock vs Flow Variable
3. Stock: Stock refers to any quantity that is measured at a particular point in time. Eg – Price, Inventory, Net worth etc
4. Flow: Flow measures an economic variable over a defined period of time. Flow is always measured in the units of time, such as quarterly, monthly, or yearly. E.g. – GDP, Exports, Unemployment rate etc