What it means
Economists separate what is produced inside a country's borders from what is earned by its people. A factory owned by a foreign company produces output in the country, but the profits flow to its foreign owners.
Likewise, a national who owns shares in a foreign business earns income from output produced overseas. Net foreign factor income, often shortened to NFFI, records this two-way flow.
It adds the factor income received from abroad, such as dividends from overseas shares, interest on foreign bonds and wages earned by residents working abroad. It then subtracts the same kinds of income paid abroad, such as profits sent home by foreign-owned firms and interest paid to overseas lenders.
The result can be positive or negative. A country that has built up large overseas investments, for example through savings or resource wealth, tends to have positive NFFI.
A country that depends heavily on foreign capital and has lots of foreign-owned businesses tends to have negative NFFI, because a share of what its economy produces is paid abroad. The figure matters for business because it explains why domestic output and national income can differ.
In some small economies with many multinational operations, the gap is large, so GDP overstates how much income stays with residents. Analysts, lenders and credit agencies therefore look at gross national income when judging the capacity of a country to pay its debts.
The nuance is that NFFI covers income from labour and capital, not transfers such as gifts or aid. It is also affected by exchange rates and by accounting choices that multinational groups make about where to book profits.
Data users should read the notes from the statistical agency about how these flows are measured. A practical way to remember the idea is to ask who gets the money.
GDP follows the location of the production, while national income follows the nationality of the owner. A finance team assessing a market should know which of the two it needs, since sales potential usually follows resident income and not the profits paid out to overseas shareholders.
In practice
Real-world examples.
Example
A country has invested its resource revenue in overseas bonds and shares for decades. Each year it receives $30 billion of interest and dividends from abroad and pays out $10 billion. The positive NFFI of $20 billion lifts national income above GDP.
Example
A small economy hosts many foreign-owned factories. They send $25 billion of profits home each year, while residents earn only $5 billion from abroad. NFFI is -$20 billion, so local incomes are lower than GDP suggests.
Example
A development bank analyst compares two countries with the same GDP. One has a large number of workers abroad sending income home and the other has heavy foreign debt. The first has a positive NFFI and a stronger national income, which affects the analyst's view of repayment capacity.
Formula
Calculation
NFFI = factor income received from abroad - factor income paid abroad
Gross national income (GNI) = GDP + NFFI
A country has GDP of $1,000 billion. Its residents earn $80 billion from abroad in dividends, interest and wages, while it pays $60 billion to foreign owners and lenders. NFFI = 80 - 60 = +$20 billion. GNI = 1,000 + 20 = $1,020 billion. If the figures were reversed, NFFI would be -$20 billion and GNI would be $980 billion.Case study
Seen in the real world.
Calderon Islands is a fictional economy with $50 billion of GDP, much of it produced by foreign-owned hotels and mines. In this illustrative case, foreign owners took out $9 billion of profits each year, while residents earned only $2 billion from abroad. NFFI was therefore -$7 billion, and gross national income was $43 billion.
The finance minister had been comparing the country with a neighbour using GDP and thought the two were equal. When the central bank explained that residents actually received about 14% less than GDP suggested, the government changed its tax policy and encouraged local ownership in the tourism sector. The episode showed why national income can tell a different story from domestic output, and the ministry now publishes both figures side by side in its annual economic review.
Watch out
Common mistakes.
- Assuming GDP equals the income of residents. NFFI shows the difference, which can be large in economies with many foreign owners.
- Including aid or gifts. These are transfers and are recorded separately from factor income.
- Thinking a negative NFFI is always bad. It can reflect heavy foreign investment that built productive capacity, as long as the investments earn good returns.
Questions
People also ask.
Why is it called factor income?
Because it is the reward paid to the factors of production, which are labour, capital and land.
How is it related to the current account?
NFFI is part of the primary income balance within the current account.
Which measure should I use, GDP or GNI?
Use GDP to understand production inside the borders and GNI to understand income received by residents.
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