INTRODUCTION

National income accounting is a branch of macroeconomics of which estimation of national income and related aggregates is a part. National income, or for that matter any aggregate related to it, is a measure of the value of production activity of a country. But, production activity where and by whom? Is it on the territory of the country? Or, is it by those who live in the territory? In fact it is both. This raises further question. What is the scope of territory? Is it simply political frontiers? Or, is it something else? Who are those who live in the territory? Is it simply citizens? Or, it is something else. The answer to these questions leads us to the concepts of (i) economic territory and (ii) resident. The two have an important bearing on the estimation of national income aggregates. How? We will explain it a little later.

Definition

The first thing to note is that economic territory of a country is not simply political frontiers of that country. The two may have common elements, but still they are conceptually different.

Let us first see how it is defined. According to the United Nations :

Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.

The above definition is based on the criterion “freedom of circulation of persons, goods and capital”. Clearly, those parts of the political frontiers of a country where the government of that, country does not enjoy the above “freedom” are not to be included in economic territory of that country. One example is embassies. Government of India does not enjoy the above freedom in the foreign embassies located within India. So, these are not treated as a part of economic territory of India. They are treated as part of the economic territories of their respective countries. For example the U.S. embassy in India is a part of economic territory of the U.S.A. Similarly, the Indian embassy in Washington is a part of economic territory of India.