Basic Terminologies of National Income

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The key terminologies/(basic terminologies of National Income) related to national income are briefly explained below.

Domestic Territory of a Country

United Nations states that economic or domestic territory is the geographical territory, governed by a government within which, individuals, goods, and capital distribute freely. It includes the following geographic or electoral boundaries:

  • Territorial waters of the country.
  • Ships and aircrafts owned and operated by the residents of the country between two or more countries (For example, planes operated by Air India between Russia and Japan are part of the domestic territory of India.)
  • Fishing vessels, oil rigs, and floating platforms operated by the residents in the international waters (For example, fishing boats operated by Indian fishermen in international waters of the Indian Ocean will be considered a part of the domestic territory of India.);
  • Embassies, consulates, high commissions, and military establishments of the country that are located in foreign lands (For example, the Russian Embassy in Japan is a part of the domestic territory of Russia).

Normal Residents of a Country

A normal resident of a country is a person or institution that normally resides in a country and whose center of economic interest lies in that country. It includes the following:

  • All production units operating in the country.
  • Nationals and the foreign nationals who stay for more than a year in the country.
  • Citizens who have moved abroad but returned within a year.
  • Citizens go to work in the foreign embassies and international institutions located in the country.
  • Students and patients of a country who have moved overseas and stay there even for more than a year.

Normal Residents = Nationals living in Germany + Non- nationals living in Germany

The persons who will not be included in the category of normal residents of a country cover the following.

  • Foreign nationals staying the country for the purpose of education, trips, seminars, medical treatments, etc., and staying for a period of less than one year (these persons, if they remain higher than a year, will be counted as normal residents)
  • Crew members of overseas vessels, businessmen, and seasonal workers in the country if their stay is of less than a year (if they stay for more than one year, they will be considered as normal residents)
  • Global institutions or organizations (like IMF, WTO, WHO, ILO, etc.) are not considered as normal residents of a country where they are located. They are residents of the international area.
  • Foreign national employees of international organizations if their stay is of less than a year. However, German nationals employed in the offices of these organizations situated in Germany will be considered as normal residents of Germany; and
  • Officials, diplomats, and members of the armed forces of a foreign country.

Non- resident of a Country

If a Dutch national goes abroad and stays there for a period of less than one year, he will remain a normal resident of the Netherlands. But if he stays there for more than one year he will be treated as a non-resident of the Netherlands.

Flow: It is a quantity that can be measured over a specific period.

Stock: It is quantity measurable at a particular Point in time.

Accounting Year: The financial year in which the flow of income in an economy is recorded.

Economic and Non-Economic Production

The initial refers to the production of those goods and services which are meant for sale and have market value. And the latter includes the production of goods and services which are not meant to be sold or have no market value.

For example, goods and services produced by a business firm are economic productions, and goods and services produced for self-consumption are non-economic activities or production.  

Economic and non-economic production is also known as economic and non-economic activities. For the welfare of humans, non-economic production also plays a vital role. But it is not included in the measurement of the national income of the nation.

Intermediate and Final Products

If a good is used by the producers as raw material, it is to be treated as an intermediate good. Also, if it is purchased and resold by the producers, it is to be treated as an intermediate good. But if it is used by the producer as a fixed asset (like a tractor used by the farmer), it is to be treated as a final good. And goods purchased by the households for final consumption, are to be treated as final goods.

Thus, a good as such is not to be named as final or intermediary. Milk as such is not to be taken as final or intermediary. It is to be treated as final or intermediary depending on its end-use. It may also be noted that a good may be used partly as an intermediary and partly as a final.

Thus, the entire milk sold by the dairy farmers in a village may not be a final good. Only that part of it is to be treated as the final good which is sold to the consumer households. The other part which is sold to the producers for making sweets (and which is used as a raw material) is to be treated as an intermediate good.

Intermediate goods are not included in the national income accounting. Only final goods or products are included in the national income accounting.

Transfer Payment

A transfer payment is the flow of income without the reverse flow of goods and services. Generally, the term transfer payment is used to denote government payments to individuals through social programs such as welfare, student grants, social security, etc.

For example, the old-age pension paid by the government is a transfer payment.

Transfer payments are not included in the national income accounting as such payments do not result in any addition to the total production nor do they add any additional value to the society.

Consumer and Producer Goods

Consumption goods (or consumer goods) are those goods that are directly used for the satisfaction of human wants. Example: Ice cream and milk as used by the households. These goods are consumed by the households when purchased. Consumption goods are broadly classified into four categories, durable consumption goods, semi-durable consumption goods, non-durable or single-use consumption goods, and services.

Capital goods are fixed assets of the producers. These goods are used in the process of production for several years and are of high value. The use of these goods leads to depreciation (loss of value of fixed assets when these are repeatedly used). Example: Plant and machinery. Capital goods are also known as producer goods.

Capital Gain

Capital gain refers to income received from the sale of financial assets whose value has increased over the holding period.

An asset may include tangible property, a business, a building, or intangible property such as shares, etc.

Capital gains are not included in national income accounting as they do not add to the productive capacity of an economy.

Factor Cost and Market Price

Factor cost

It is the overall cost of all the factors of production consumed or used in producing a good or service. In another word, factor cost is the total sum of all payments paid to the owners of factors of production in terms of compensation of employees, i.e. rent, profit, interest, etc.

Market Price

On the other hand, the market price is the price at which a product is sold in the market. It comprises the cost of production in the form of wages, rent, interest, input prices, profit, etc. along with taxes imposed by the government and the subsidies provided by the government to the producers

            Market prices = Factor cost + Product taxes/indirect tax – Product subsidies

            Or Market Price = Factor cost + Net indirect taxes

            Where Net indirect taxes = Indirect taxes – Subsidy

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