Net Factor Income from Abroad: (Components and Significance)

Net Factor Income from Abroad: (Components and Significance)!

Net factor income earned from abroad which is used to differentiate between national income and domestic income.

Alternatively NFIA is the difference between factor incomes received from abroad and factor income paid abroad. Net factor income from abroad is the difference between the factor income earned from abroad by normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e., India). CSO defines it as “Income attributable to factor services rendered by the normal residents of the country to the rest of the world, less factor services rendered to them by the rest of the world.”

Symbolically:

NFIA = Factor income earned from abroad by residents – Factor income of non-residents in domestic territory.

The normal residents of a country earn factor income not only within the domestic territory of a country but outside it also. Income from outside can be earned mainly in two ways, namely, (i) income from work and ill) income from property and entrepreneur ship as shown below. Mind, it is a two-way affair since foreigners also earn income by working in domestic territory of other country.

(i) Income from Work (Compensation of employees):

Income from work can be earned by working in the domestic territories of other countries earning thereby wages and salaries (or compensation of employees). For Instance, suppose in 2008-2009, Indian resident scientists, engineers, doctors, dancers, masons, carpenters employed abroad earned factor income of Rs 10,000 crore whereas similar payments made to non-resident workers employed in domestic territory of India was to the tune of Rs 8,000 crore. Net compensation of employees from abroad to India would be Rs 2,000(= 10,000-8,000) crore.

(ii) Income from property and entrepreneurship (Rent, interest, profit):

Factor income from abroad is also earned by owning property (Like buildings, shops, factories, financial assets like bonds and shares in foreign countries) earning thereby rent and interest. Also, profit is earned for undertaking entrepreneurial activities of producing goods and services.

For instance, suppose in 2008-2009, normal residents of India living temporarily abroad earned Rs 25,000 crore by way of rent, interest and profit and similar payments made to the rest of world were, say Rs 20,000 crore. Net income from property and entrepreneurship from abroad would be Rs 5,000 (= 25,000-20,000) crore.

(iii) Net retained earnings of resident companies abroad:

This is the third element of net factor income from abroad. Retained earnings of a company are in fact its undistributed profit. For instance, suppose in 2011-2012 Indian companies working abroad, after paying profit tax and distributing dividend out of their total profits, retained the balance profit (known as Reserve or Undistributed profit) of Rs 50,000 crore and foreign companies in India retained similar profit of 65,000 crore. Net retained earnings of resident companies abroad would be Rs15, 000(= 50,000-65,000) crore.

From the above mentioned data, India’s net factor income from abroad in 2008-09 would be equal to Rs 8,000 [= 2,000 + 5,000 + (-15,000)] crore.

Components of net factor income from abroad:

In the light of the above discussion, it is easy to work out components of net factor income from abroad.

Following are its three main components:

(i) Net compensation of employees.

(ii) Net income from property and entrepreneurship (rent, interest, profit).

(iii) Net retained earnings of resident companies abroad.

Expressed in the form of an equation:

Net factor income = Net compensation of employees + Net income from abroad from property and entrepreneurship + Net retained earnings of resident companies abroad.

It may be noted that net factor income from abroad can be negative as well as positive. This is negative when income earned by foreigners from our country is more than the income earned by us from abroad and positive when the former is less than the latter.

Significance:

Net factor income from abroad is used to differentiate between National income and Domestic income. By adding NFIA to domestic income, we get national income.

Symbolically:

National income = Domestic income + NFIA.

Domestic income = National income – NFIA