Basic concepts of macroeconomics

• Domestic territory


  The geographical territory administered by the government within which persons, goods and capital circulate freely
• Domestic territory includes


  • Ships and aircrafts owned and operated by normal residents between two or more countries
  • Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in international waters where they have exclusive rights of operation
  • Embassies, consulates and military establishments of a country located abroad
  • Embassies, consulates and military establishments of a foreign country
  • International organisations like UNO, WHO, etc. located within the geographical boundaries of a country
• Domestic territory does not include

  • Foreign tourists and visitors who visit a country for recreation, holidays, medical treatment, study, sports, conferences, etc.
  • Foreign staff of embassies, officials, diplomats and members of the armed forces of a foreign country, located in the given country
  • Employees of international organizations (unless they work in an international organization for more than one year)
  • Crew members of foreign vessels, commercial travelers and seasonal workers provided their stay is less than one year
  • Border workers
• Resident

  An individual or an institution who ordinarily resides in the country and whose centre of economic interest also lies in that country
• The resident lives or is located within the Domestic territory and the resident carries out basic economic activities of earnings, spending, and accumulation from that location
• Centre of economic interest

  Implies two things: the resident lives or is located within the Domestic territory and the resident carries out basic economic activities of earnings, spending, and accumulation from that location
• Employees of international organizations are considered residents of countries to which they belong and not of the international area, unless they work in an international organization for more than one year
• Border workers are considered as normal residents of the country where they live and not where they work
• Citizenship

  A legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen
• Residentship

  An economic concept based on the basic economic activities performed by a person. An individual is a normal resident of a country if he ordinarily resides in the country for a period of more than one year and his center of economic interest also lies in that country
• A Chinese living in India for more than one year is a normal resident of India. However, he is not a citizen (or national) of India as he does not hold citizenship of India
• Domestic product


  Includes production activity of production units located in the economic territory irrespective of the fact whether carried out by Residents or Non-residents
• Domestic income


  The monetary value of the domestic product
• National product


  Includes production activities of normal residents irrespective of the fact whether performed within the economic territory or outside it
• National income


  The monetary value of the national product
• Factor income

  Income received by factors of production for rendering factor services in the production process
• Transfer income

  Income received without rendering any productive service in return
• Factor income is included in both national income and domestic income, while transfer income is neither included in national income nor in domestic income
• Factor income is an earning concept, while transfer income is a receipt concept
• Factor income is received by factors of production (Land, Labour, capital and enterprise), while transfer income is received by households and the government
• Factor income

  • Rent, wages, interest and Profit
• Transfer income

  • Scholarship, old age pension, unemployment allowance, etc.
• Final goods


  Goods which are used either for consumption or for investment
• Intermediate goods

  Goods which are used either for resale or for further production in the same year
• Final goods are included in both national and domestic income, while intermediate goods are neither included in national nor in domestic income
• Final goods are ready for use by their final users, while intermediate goods are not ready for use and some value has to be added to them
• Final goods have crossed the production boundary, while intermediate goods are still within the production boundary
• Final goods

  • Milk purchased by households for consumption, and cars purchased as an investment
• Intermediate goods

  • Milk used in dairy shops for resale, and coal used in factories for further production
• Transfer receipts are of two types: Current Transfer and Capital Transfer
• Domestic territory

  The geographical territory administered by the government within which persons, goods and capital circulate freely
• Current transfers are made out of income, while capital transfers are made out of the wealth of the payer
• Current transfers are generally regular in nature, while capital transfers are irregular
• Current transfers are meant for consumption purposes, while capital transfers are meant for capital formation
• Current Transfers

  • Old age pension, gifts, unemployment allowance
• Capital Transfers

  • Investment grants, capital gains tax, war damages
• Expenditure on final goods purchased by households is called consumption expenditure
• Expenditure on final goods purchased by producers is called investment expenditure
• Final Goods = Consumption Expenditures + Investment Expenditure
• National income includes only final goods