The Relationship Between Domestic Factor Income and National Income

To understand the relationship between domestic factor income and national income, we need to first define these terms.

Domestic Factor Income: Domestic factor income refers to the income earned by domestic factors of production, such as labor and capital, within a country's borders. It includes wages, salaries, rent, and profits earned by individuals and businesses within the domestic economy.

National Income: National income, on the other hand, is the total income earned by all factors of production, both domestic and foreign, within a country's borders. It includes domestic factor income as well as net factor income from abroad.

Net Factor Income from Abroad: Net factor income from abroad is the difference between the income earned by domestic factors of production in foreign countries and the income earned by foreign factors of production within the domestic economy. It includes wages, salaries, rent, and profits earned by domestic factors abroad, minus the income earned by foreign factors in the domestic economy.

The Role of Net Factor Income from Abroad in Calculating National Income:

Now, let's consider the question at hand - what must be added to domestic factor income to obtain national income? The correct answer is option 'A', which is net factor income earned from abroad.

Net factor income from abroad is an important component of national income as it represents the income earned by domestic factors of production in foreign countries. By including this income in the calculation of national income, we get a more comprehensive measure of the total income generated within a country's borders.

Including net factor income from abroad is necessary because factors of production, such as labor and capital, can also earn income outside of the domestic economy. For example, a domestic company may have subsidiaries or branches in foreign countries where it earns profits. Similarly, domestic workers may find employment opportunities abroad and earn wages there.

By adding net factor income from abroad to domestic factor income, we capture the income earned by domestic factors both within the domestic economy and abroad. This provides a more accurate measure of the total income generated by a country's factors of production.

Conclusion:

In conclusion, when calculating national income, we need to add net factor income from abroad to domestic factor income. This is because net factor income from abroad represents the income earned by domestic factors of production in foreign countries, which is an important component of a country's total income. Including this income provides a more comprehensive measure of national income and helps capture the income generated by a country's factors of production both domestically and abroad.