Before we delve into the important exam related topics, it is necessary that we understand a few basic concepts so that we can easily understand the related (and perhaps a bit more complex) concepts later on. Most aspirants tend to jump the gun and directly start to study GDP, GNP, National Income etc. without understanding the foundations of these definitions. Remember that economics is a technical subject and you would not reach very far if you try to memorize definitions without actually understanding it


Suppose you are living in America and you have to visit the Indian Embassy in Washington DC for some work. So when you are at the Indian Embassy, are you technically in America or India? 

How about being inside an Indian aircraft (say Air India) at the Heathrow Airport in London? Would you be in United Kingdom or India?

Although in common terms domestic territory would refer to the geographical boundaries of a country, in economics DOMESTIC TERRITORY has a different meaning.

In Economics, Domestic Territory refers to the economic territory which includes the territory administered by a government within which persons, goods and capital circulate freely. Please note that economic geographical territory is different from the political geographical territory which means the boundaries of a country.


Domestic territory of a nation includes the following:

1)  Territory lying within the geographical boundaries including airspace and territorial waters of a country. This includes the areas from Kashmir to Kanyakumari in India. Territorial water is the belt of coastal waters that go at most 12 nautical miles (22 km; 14 mi) from the edge of a coast.

2)  Ships including fishing vessels, and aircrafts operated by residents of the country (in our case Indians) across different parts of the world. Thus if you are inside an Indian Aircraft at the Heathrow Airport, you would still be inside India’s domestic territory.
Please note an Indian aircraft or ship travelling between two cities, it possible that both the cities might not be from India. For example an AIR INDIA aircraft flying between Tokyo and Paris would still be a part of the domestic territory of India even though both the destinations are outside India. This is because the aircraft is a property of India.


3)  Oil and Natural Gas and floating platforms from a resident country operating in foreign waters. Again these are properties of India.

4) Diplomatic missions like embassies and consulates and military establishments of a country located abroad. Therefore the Indian Embassy in Washington DC is a part of our domestic territory. Embassies, consulates and military establishments are all properties of India.

Please note that domestic territory DOES NOT INCLUDE individual property or private companies in foreign countries. For example – If an Indian citizen owns a house (or land) in Amsterdam, it will NOT BE INCLUDED in domestic territory. Now after keeping the above in mind, it is obvious that other countries’ embassy, military bases etc located in India are not considered a part of our Domestic Territory.


Now that we have understood Domestic Territory and Factor Income, we are in a position to fully define Domestic Income.

Domestic Income is the sum of all Factor Incomes in a domestic or economic territory of a country irrespective of the fact that it is earned by a resident of the country or a non – resident of the country.



Sum of all factor income generated

In the Domestic (or Economic) Territory of a nation



Hope you remember the difference between Residents and Non-Residents ? If not, read it here

So the salary (factor income from Labor) of a British citizen working in the Indian Embassy in London would be added to Domestic Income. Remember this – to calculate domestic income, we do not look into the residential status of the person earning it. We simply see whether the income is earned in the domestic territory.

What about the rent earned by an Indian citizen from his house in Berlin? Will this income be added to domestic income? No because the house is in Berlin and it is not a part of domestic territory of India.

Will the profits earned by a branch of an American Bank in New Delhi be included in Domestic Income of India? Yes because it is being earned in a domestic territory of India (New Delhi is a part of domestic territory of India).


Similarly the income of a branch of an Indian Bank (say ICICI Bank) in London would NOT BE INCLUDED in Domestic Income as it is not earned in a domestic territory (London is not a domestic territory)