Domestic and National Income

Domestic and national income is defined by domestic and national concepts in an economy. These terms define the income generated by residents or non-residents within or outside the domestic territory.

Domestic and National Income:

 Domestic income is the total of factor incomes generated by residents as well as non-residents within a domestic territory of a country. In contrast, the national income is the sum of factor incomes earned within or outside the domestic territory by normal residents of a country only. To understand these concepts, the concept of domestic territory must be cleared.

Domestic Territory of a Country:

In economics, the domestic territory is the geographical territory controlled by the government within which the persons, capital, and goods move freely. Thus, the domestic territory is a much wider concept than the political territory of any nation. In other words, the domestic territory of a nation includes:

1. the territory lying within political frontiers including territorial waters of a country.
2. Ships and aircraft operated by residents in the rest of the world. For instance, Indian ships moving between japan and Korea regularly.
3. Fishing vessels, oil and natural gas rigs, and floating platforms operated by residents in international waters. It also includes the engagement in extraction areas in which a country has the exclusive right of exploitation. For instance, the fishing boats operated by Indian fishermen in the international waters of the Indian ocean.
4. Embassies, consulates, and military establishments of the country located in other countries. For example, the Indian embassy in Canada is a part of the domestic territory of India.

Thus, domestic territory refers to the area of operation where persons, goods, and capital can circulate freely for economic interest. Hence, the factor incomes generated within domestic territory would be known as domestic income.

Conversion of Domestic income into National Income:

As we have discussed that the domestic income includes the factor incomes earned within the domestic territory of a country during a year. It includes the income of both residents as well as non-residents within the territory. Here, it is important to remember that domestic income :

1. includes Factor income earned by non-residents in the domestic territory of a nation.
2. The factor income earned by residents in the domestic territory of any other nation.

Also, the difference between the above two is known as Net factor income from abroad. In other words,

Net income from abroad = factor income earned by residents in the domestic territory of any other nation - Factor income earned by non-residents in the domestic territory of a nation

Accordingly, the domestic income can be converted into national income when

1. we exclude the factor income earned by non-residents in the domestic territory, 
2. And, Add up the factor income earned by residents in the rest of the world.

Thus, we can say:

Domestic Income - factor income earned by non-residents in domestic territory + factor income earned by residents in rest of the world = National Income

Or

Domestic Income + Net Factor Income from abroad = National Income

On the other hand, for converting national income to domestic income, we will use:

National income - Net Factor Income from abroad = Domestic Income