For a dollar more: How are these people chosen, and are these people residents of the Vatican City state?
From Wikipedia:
**Citizenship
Pre-March 2011**
Unlike citizenship of other states, which is based either on jus sanguinis (birth from a citizen, even outside the state’s territory) or on jus soli (birth within the territory of the state), citizenship of Vatican City is granted jus officii, namely on the grounds of appointment to work in a certain capacity in the service of the Holy See. It usually ceases upon cessation of the appointment. Citizenship is extended also to the spouse, parents and descendants of a citizen, provided they are living with the person who is a citizen.[52][53]
Anyone who loses Vatican citizenship and does not possess other citizenship automatically becomes an Italian citizen as judged by Italian law.[19]
As of 31 December 2005, there were, apart from the Pope himself, 557 people with Vatican citizenship, while there were 246 residents in the state who did not have its citizenship.
Of the 557 citizens, 74% were clergy:
58 cardinals, resident in Rome, mostly outside the Vatican;
293 clergy, members of the Holy See’s diplomatic missions, resident in other countries, and forming well over half the total of the citizens;
62 other clergy, working but not necessarily living in the Vatican.
The 101 members of the Papal Swiss Guard constituted 18% of the total, and there were only 43 other lay persons with Vatican citizenship.[54]
Post-February 2011
On 22 February 2011, Pope Benedict XVI promulgated a new “Law concerning citizenship, residency and access” to Vatican City, which became effective on 1 March. It replaced the 1929 “Law concerning citizenship and residence”.[55] There are 16 articles in the new law, whereas the old law had 33 articles.[56] Vatican citizenship now has four categories: (1) the pope, (2) cardinals residing in Vatican City, (3) active members of the Holy See’s diplomatic corps, and (4) other directors of Vatican offices and services.[56] The new law created a new status, that of official Vatican “residents”, i.e., people who live in Vatican City but are not citizens.[56] As of 1 March 2011, the Vatican had 572 citizens, but only 220 of them were living in Vatican City.[56] The other 352 citizens were apostolic nuncios and diplomatic staff.[56] The 220 citizens living in Vatican City were among more than 800 people living in the Vatican.[56]