Net foreign factor income (NFFI) captures the net flow of income payments between the domestic economy and the foreign sector. It is the difference foreign payments to domestic citizens and domestic income payments to foreign citizens. NFFI is usually quite small, less than 1 percent of gross domestic product. However, the two components of net foreign factor income: (1) foreign payments to domestic citizens and (2) domestic payments to foreign citizens are more substantial. Each tends to be around 3 percent of gross domestic product. Net foreign factor income is small because the two larger components almost cancel out.
Domestic and National ProductNet foreign factor income separates gross domestic product, which measures total production within the political boundaries of a country, from gross national product, which measures total production of resources owned by citizens of a country. While most production within a nation's political boundaries is undertaken by resources owned by citizens of that nation, there are exceptions. Some citizens own resources that do their production in the foreign sector. And some resources owned by foreign citizens do their production within the political boundaries of the domestic economy. Net foreign factor income captures these exceptions.
Suppose, for example, that a foreign citizen is employed in the domestic economy. For example, suppose that Aukla Auklonavic, a citizen of the Republic of Northwest Queoldiolia, has found employment fabricating Stuffed Amigos in the Wacky Willy assembly plant located in Shady Valley, U.S.A. Aukla's productive efforts is included in gross DOMESTIC product, but not gross NATIONAL product. Aukla's income falls under the heading of factor payments made to foreign citizens for domestic production.
Alternatively, suppose a domestic citizen is employed in the foreign sector. For example, suppose that Edgar Millbottom, a citizen of the United States of America, finds employment making sundials in a sundial factory in the Republic of Northwest Queoldiolia. Edgar's productive efforts are included in gross NATIONAL product, but not gross DOMESTIC product. Edgar's income falls under the heading of factor payments received from the foreign sector by domestic citizens.
If Aukla earns $15,000 in a given year for his productive efforts in the U.S. Wacky Willy factory, while Edgar earns $20,000 for this work in the Northwest Queoldiolia sundial factory, then net foreign factor income is $5,000 ($20,000 - $15,000). As such, gross DOMESTIC product is $5,000 LESS than gross NATIONAL product.
By the way, everything said about how net foreign factor income separates GROSS national product and GROSS domestic product applies to NET national product and NET domestic product, too. The only difference is that the NET products are adjusted by the capital consumption allowance.
Domestic Product and National IncomeNet foreign factor income is also a key difference between DOMESTIC product (both gross and net) and NATIONAL income. The reasoning is essentially the same as that between gross DOMESTIC product and gross NATIONAL product. Gross DOMESTIC product is, of course, the total production taking place within a nation's political boundaries, regardless of resource ownership. NATIONAL income, in contrast is the income earned by citizens of the nation, regardless of where they earn the income.
Once again, the productive effort of Aukla Auklonavic, a citizen of the Republic of Northwest Queoldiolia, is included in gross DOMESTIC product. But Aukla's income is NOT included in NATIONAL income. Aukla is NOT a U.S. citizen, his income is not included in U.S. NATIONAL income.
However, the income earned by Edgar Millbottom is included in U.S. NATIONAL income, even though he happens to be employed in a foreign land. Edgar is a U.S. citizen and his earned income is included in U.S. NATIONAL income. As such, net foreign factor income is added to gross DOMESTIC product to derive NATIONAL income.
If Aukla earns $15,000 in a given year for his productive efforts in the U.S. Wacky Willy factory, while Edgar earns $20,000 for his work in the Northwest Queoldiolia sundial factory, then net foreign factor income is $5,000 ($20,000 - $15,000) and NATIONAL income receives a $5,000 boost over gross DOMESTIC product (ignoring other adjustments between gross domestic product and national income).
NET FOREIGN FACTOR INCOME, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 16, 2018].