National Income - Factor Incomes and Normal Residents

 

National income refers to the sum total of factor incomes earned by normal residents of a country during the period of a year.

Concept of National Income:

National income is the aggregate of factor incomes earned in an economy by the normal residents during a financial year. This definition explains that the national income includes two main components:

1. Factor incomes only
2. The income of normal residents only

Factor Incomes: 

It refers to all the incomes received against factor services and transfer incomes. When the household sector renders factor services to the producer sector, it gets paid as a reward. It is known as factor incomes. As households are the owner of factors of production, they consider these as factor incomes. And, the firms consider these as factor payments. On the other hand, when one receives income as a charity, help or donation, it is known as transfer income. Therefore, we can say the factor income is earned income and transfer income is unearned income.

Factor incomes include:

1. Compensation of employees (received by households for rendering services as employees in the producer sector).
2. Rent (received by households for the use of their land by producing sector).
3. Interest (received by households for the use of their capital by producer sector).
4. Profit (received by the household for the use of entrepreneurial skills by producer sector).

Here, it is important to note that national income is the sum total of factor incomes only. Thus, it doesn't include transfer income while calculating national income.

Normal Residents:

A normal resident refers to the one who ordinarily resides in a country and his/her economic interest lies in that country. Here, ordinary residing refers to the person residing in a country for a period of one year or more. And, economic interest is present when one conducts economic transactions in that country on a significant level. Furthermore, the following are some of the observations related to normal residents:

• Normal residents include both individuals and institutions as well.
• The normal residents are not necessarily the citizen of that country. A person can be normally resident in one country and a citizen of another. For example, suppose a person who is a citizen of India is residing in Canada for more than a year. With this, he conducts his economic transactions in Canada. Thus, he will be regarded as a normal resident of Canada.
• The international organisations such as WHO and IMF in a country are not included in the normal residents of that country. In contrast, a country working in these organisations would be taken as normal residents.
• Persons which are not treated as normal residents of a country are:
  • Foreign visitors in the country for holidaying, medical treatment, studies, conferences, sports etc.
  • Crew members of foreign vessels, commercial travellers and seasonal workers of the country
  • Foreigners who are employees of non-resident enterprises and visiting country to install machinery in these enterprises. These people will be considered non-residents as they visit the country for less than a year.
• Border workers are treated as residents of a country in which they live, not of the country in which they work.
• Normal residents also include officials, diplomat, and members of armed forces of a foreign country to which they belong, not of a country in which they are employed.

Thus, normal residents of a country include:

1. Citizens and institutions normally residing in a country with economic interest.
2. With this, Citizens of other nations who live in the country for more than 1 year with some economic interest.
3. Citizens of the country working in international organizations or embassies in their own country.
4. And, the citizens of a country living abroad for less than one year with an economic interest lies in the home country.

Therefore, we may define national income as the sum total of factor incomes earned by normal residents of a country in a particular year.

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References:

Introductory Microeconomics – Class 11 – CBSE (2020-21)