It is the difference between the factor income earned by a country from abroad/rest of the world and factor income paid by a country abroad/rest of the world. Factor income from abroad is the income earned by a country’s normal residents from the rest of the world for the factor services provided by them. The income is earned in the form of rent, wages, interest, salaries, dividends and retained earnings. However, Factor income to abroad is the income paid by a country’s normal residents to the normal residents of other countries (i.e., non-residents of the former country) for the factor services given by them within the economic territory.
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
Significance of Net Factor Income from Abroad (NFIA)
Net Factor from Abroad (NFIA) is essential for differentiating between the Domestic Income and National Income of an economy. At first, the Domestic Income is determined, and then after adding NFIA to it, National Income is determined.
| Domestic Income + Factor Income from Abroad – Factor Income to Abroad= National Income |
The difference between factor income from abroad and factor income to abroad is NFIA or Net Factor Income from Abroad. Therefore, another formula for National Income is,
National Income = Domestic Income + NFIA
The Net Factor Income from Abroad of an economy can be zero, positive, or negative.
It will be zero when the factor income earned from abroad and paid to abroad is equal.
NFIA will be positive when the factor income earned from abroad is more than the factor income paid to abroad.
However, it will be negative when the factor income earned from abroad is less than the factor income paid to abroad.
Components of NFIA
1. Net Compensation of Employees: It is the difference between income received from work by the resident workers living or employed abroad for less than one year and similar payments made by an economy to the non-resident workers staying or employed within the economic/domestic territory of a country for less than one year.
2. Net Income from Property and Entrepreneurship: It is the difference between income received in the form of rent, dividend, interest, etc., from property and entrepreneurship by the residents of a country and similar payments made to the non-residents of that country.
3. Net Retained Earnings: Retained earnings are that part of the profit which is kept aside as a reserve for the future after payment of corporate tax and dividends. Net Retained Earnings is the difference between the retained earnings of the resident companies, which are located abroad and the retained earnings of the non-resident companies, which are located within the domestic territory of the country.
Net Factor Income from Abroad = Net Compensation of Employees + Net Income from Property and Entrepreneurship + Net Retained Earnings
Practice Question 1
Calculate NFIA if Factor Income from Abroad is ₹1,000 and Factor Income to Abroad is ₹300.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹1,000 – ₹300
= ₹700
Practice Question 2
Calculate NFIA if Factor Income from Abroad is ₹670 and Factor Income to Abroad is ₹1,500.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹1,500 – ₹670
= -₹830
Practice Question 3
Calculate NFIA if Factor Income from Abroad is ₹1,000 and Factor Income to Abroad is ₹1,000.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹1,000 – ₹1,000
= ₹0
Practice Question 4
Calculate NFIA if Factor Income from Abroad is ₹700.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹700 – ₹0
= ₹700
Practice Question 5
Calculate NFIA if Factor Income to Abroad is ₹300.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹0 – ₹300
= -₹300
Practice Question 6
Calculate NFIA if Factor Income to Abroad is -₹1,200.
Answer
Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad
= ₹0 – (-₹1,200)
= ₹1,200
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