Question

"In a two-sector economy, National Income is always equal to Domestic income " Defend or refute the given statement with valid reasons.

Hint:

National Income includes net income from abroad, whereas Domestic Income considers only the income generated within the country's borders.

Answer 1

The given statement is false. National Income is not always equal to Domestic Income in a two-sector economy. In a two-sector economy, there are only two sectors: households and firms. The main distinction between National Income and Domestic Income lies in the concept of Net Factor Income from Abroad (NFIA). 1. Domestic Income (DI): - Domestic Income refers to the total income earned within the geographical boundaries of a country. It includes income generated by all the factors of production located within the country, whether owned by residents or foreigners. - Formula: \[ \text{Domestic Income} = \text{National Income} - \text{Net Factor Income from Abroad} \] 2. National Income (NI): - National Income refers to the total income earned by the residents of a country, regardless of whether the income is earned inside or outside the country. It includes the income from abroad, i.e., Net Factor Income from Abroad. - Formula: \[ \text{National Income} = \text{Domestic Income} + \text{Net Factor Income from Abroad} \] In a two-sector economy, there is typically no distinction between National Income and Domestic Income if we assume that there is no foreign income or payments (i.e., Net Factor Income from Abroad is zero). However, if the economy involves cross-border transactions, such as income from abroad, then the two incomes would differ. Hence, National Income is only equal to Domestic Income in a two-sector economy if there is no foreign income involved. In the general case where there is foreign income, National Income will exceed Domestic Income.