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 BASIC CONCEPTS OF MACRO
ECONOMICS

Domestic Territory

Domestic Territory is geographical territory administered by a government within which

persons, goods and capital circular freely.

In addition to political frontier, domestic territory also includes:-

1) Ship and aircraft owned and operated by normal residents between two countries, for
example- planes operated by Air India between London and Paris part of domestic territory
of India.

2) Fishing Vessels, oil and natural gas rigs and floating platforms operated by the residents
of a country I the international water they have exclusive rights of operation.

3) Embassies, consulates and military establishments of country located abroad for

example-Indian Embassy in Japan is domestic territory of India.

Domestic territory does not include:-

1) Embassies, consulates and military establishment of a foreign country, for example-

American embassy in India is domestic territory of America and not India

2) International organization like UNO, WHO located within the geographical boundaries of
a country.

Normal Resident

Normal Residents of a country refers to an individual or institution who ordinarily resides in

the country and whose centre of interest also lies in that country.

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Following are not included in Normal residents:-

1) Foreign Tourists & Visitors

2) Foreign staff of Embassies, officials, diplomats and members of the armed forces.

3) International Organization like WHO, UNO etc.

4) Employers of International Organizations.

5) Border workers, who cross borders on regular basis to work in other countries.

Citizenship

Citizenship is basically a legal concept based on place of birth of person or some legal
provisions allowing a person to become a citizen.

It means Indian Citizenship can arise in two ways:-

1) When a person is born in India, he acquired automatic citizenship of India.

2) A person born in India applies for citizenship and Indian laws allow him to become
Indian Citizen.

Residentship

It is an economics concept based on the basic economics activities performed by person. An

individual is a normal resident of a country if he ordinarily resides in the country for a
period more than one year and his/her centre of economic interest lies in that country.

For example-An American is working in India for more than one year, then he is a resident
of India but do not hold the citizenship of India.it means, a person can be a citizen of one
country, and at the same time, a resident of other country.

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 Factor Income and Transfer Income
Factor Income

It refers to income received by factor of production (labour, Land, Capital and Enterprise)
for rendering factor services.

Factor Incomes of normal resident is included in National Income for example-Rent, Wages,
Interest and Profit.

Transfer Income

Transfer Income refers to income received without rendering any productive service in
return. It is unilateral (One-sided) concept. As there is no production of goods or services it
is not included in National Income. For example-Pension, gifts, scholarship etc.

Difference between Factor and Transfer Income

BASIC FACTOR INCOME TRANSFER INCOME

It refers to income received by

It refers to income received
factors of production for
Meaning rendering factor services in
without rendering any
productive services in return
production process.

it is included in both domestic It is neither included in

Nature & National Income Domestic not in National Income

Concept It is an earning concept. It is receipt concept.

It is received by factors of
Recipien It is generally received by
production(Lad, labour, Capital
t households and government
& Enterprise)

Scholarship, gifts, grants, taxes

Example Rent, Wages, Interest and Profit
etc.

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 Difference between final Goods and Capital Goods
BASIS FINAL GOODS INTERMEDIATE GOODS

Final goods are those goods which are Intermediate goods are those goods
MEANING either used for consumption or for which are used either for resale or for
investment. further production.

These are either included in

These goods are included in both
NATURE domestic income nor national
domestic as well as national income.
income.

VALUE No value add-on as they are ready for Value addition is required as they are
ADDITION consumption, not ready for consumption.

PRODUCTION They have crossed the production They are still within the production
BOUNDARY boundary. boundary.

Milk purchased by households for direct Milk used by sweet shops for making
EXAMPLES
consumption. sweets.

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 CLASSIFICATION OF FINAL GOODS

Final Goods

Consumption Goods Capital Goods

Consumption Goods
Consumption Goods are those goods which satisfy a want directly.

Types:-

1. Durable Goods-It refers to goods which can be used again and again over a considerable
period of time for example-Television, AC etc.

2. Semi Durable Goods-It refers to goods which can be used for a limited period of time, for
example-clothes, crockery etc.

3. Non-durable goods- It refers to goods which are generally for one time consumption etc.,
for example dairy products. Etc.

4. Services-Services are intangible activities which can neither be seen nor touched but
satisfies the wants directly, for example-banks, teachers etc.

Capital Goods are those final goods which help in production of the goods, for example-
machines, equipment etc.

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 Capital Goods

Capital Goods are those final goods which help in production of the goods, for example-
machines, equipment etc.

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 Difference between Consumption Goods and Capital Goods
BASIS CONSUMPTION GOODS CAPITAL GOODS

Satisfaction These goods satisfy human wants These goods satisfy human wants
of Human directly. So, such goods have direct indirectly. So, such goods are derived
wants demand. demand.

Production They do not promote production They help in raising production

Capacity capacity capacity

Most of the consumption goods except

Capital Goods generally have an
Expected life durable goods have limited expected
expected life of more than one year.
life.

Example car purchased by household Car purchased by school for teachers.

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 Investment

Investment refers to addition to capital stock of an economy. For example-Construction of

roads, flyovers, Building etc.

This is 2 Types:-

Gross Investment

It is addition to the stock of capital before making

allowance for depreciation

Net Investment

Net Investment is actual addition made to the capital stock

of economy in a given period.

Net Investment = Gross Investment- Depreciation

Depreciation

It refers to fall in the value of asset due to normal wear tear, passage of time or expected
obsolescence (change in technology)

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 Net Indirect Taxes

NIT refers to the difference between Indirect Tax and Subsidies.

Net Indirect Taxes (NIT) = Indirect Tax-Subsidies

Indirect Tax

Indirect Taxes refer to those taxes which are imposed by the government on production and
sales of goods and services. For example-goods and services tax (GST)

Subsidies

Subsidies are the economic assistance given by the government to the firms and households,
with a motive of general welfare. For example-subsidy on LPG Gas Cylinders etc

Factor Cost

It refers to amount paid to factors of production for their contribution in production

process.

Market Price

It refers to the Price at which product is actually sold in the market. For example-If Price of a
LPG cylinder is Rs. 1000 and tax rate is 10%, the price of cylinder becomes Rs.1100 but a
subsidy of Rs. 50 is provided by Govt. hence final price is Rs. 1050

Here Rs.1000 is factor cost, Rs.1050 is Market Price and Rs.100 is indirect Taxes and Rs.
250 is subsidy.

Net Factor Income From Abroad

It refers to the difference between factor income received from rest of the world and factor
income paid to the rest of the world.

NFIA=Factor Income earned from Abroad-Factor Income paid Abroad.

Components of NFIA

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 (1) Net compensation of Employees-It is difference between income from work received
by resident workers living or employed abroad for less than one year & similar
payments made to non-resident workers employed domestic territory of the country.

(2) Net Income from Property and entrepreneurship-It refers to difference between
income from property and entrepreneurship received by residents of country and
similar payments made to Non-residents

(3) Net Retained earnings-It refers to difference between retained earning s of residents
companies located abroad and retained earnings of non-resident companies located
with in the domestic territory of that country.

NFIA=Net Compensation of Employees,+ Net Income from Property and Entrepreneurship

+ Net Retained earnings

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