Net Factor From Abroad

Date : 3rd .April.2020
Sub  : Economics
Class : 12
Period : 5th
Day      : 2
Time    : 10:45am- 11:25am

Learning Outcomes

• Meaning of Net Factor Income From Abroad(NFIA)
• Use of  NFIA in National Income Accounting
• Significance of NFIA  in National Income Accounting

A very good morning students.

Today we are going to learn about the net factor income from abroad.

It is also denoted by NFIA

Let us try and understand the concept.

We first need to understand the formula of NFIA

NFIA= Factor income earned from abroad - Factor Income paid abroad

This means that NFIA is the difference between factor income recieved from abroad and Factor income paid to Abroad.

By now we know that Factor Income is the Income recieved for giving any factor service.

So Factor Income From Abroad is the income that is earned by Normal Residents of a country from any other part of the world other than their Domestic Territory.

And Factor Income Paid to abroad is the income that is paid to Non Residents of a country .

Lets try and understand it by an example:

Suppose you go to America for less than a year ,that means you are a normal resident of India.You earn some money from there and come back to India within a year.That money that you have earned is called Factor Income From Abroad.

In the same way an American who comes to India and earns some money and goes back to America within a year .That money that the American earns from India is called Facor Income To Abroad.

Remember we are looking at the example from the point of calculating national Income of India.

Factor Income From Abroad can be earned in the form of wages,salaries,rent,interest,dividends and retained earnings.All this can be earned by an Indian in any other country.

In the same way an American can earn wages,salaries,rent ,interest,dividends and retained earnings from India.

Now how do we use NFIA in the calculation of National Income Accounting.

Before we calculate National Income we have to calculate Domestic Income.

Once Domestic Income is calculated we add the NFIA  to it and we derive the National Income.

Thus we can say:

National Income =Domestic Income+ Factor Income From Abroad -Factor Income To Abroad

                                        ( Factor Income From Abroad - Factor Income To Abroad) = NFIA

                               So National Income = Domestic Income + NFIA

Please remember NFIA can be Positive, Negative or Zero

If Income earned from Abroad is more than Income Paid to Abroad then NFIA is Positive

If Income earned from Abroad is less than Income Paid to Abroad then NFIA is Negative

If Income earned from Abroad is equal to Income Paid to Abroad then NFIA is Zero

Components of NFIA

1. Net Compensation to Employees : Compensation to employees means the income that employees earn for working.An Indian may go to America and earn some money and return back within the year and an American can come to India and earn some money for working and return back within a year.The difference between the two is called Net Compensation To Employees.
2. Net Income From Property And Entrepreneurship : An Indian can have property in America and an American can have property in India.Thus they both will earn a rent from thier property.Thus they earn an Income from Property.

           In the same way the Indian can have a business in America and the American can have a business in India.Thus they are both Entrepreneurs in different countries.Thus they earn an Income  from entrepreneurship.

     3.  Net Reatined Earnings : Retained Earnings are that part of Profits that are kept as reserve after paying Corporate Tax and Dividends to Shareholders by a company.

So Net Retained Earnings is the difference between Retained Earnings of Resident Companies located Abroad and Retained Earnings of Non Resident companies located within Domestic territoryof a country.

We can thus conclude by saying that NFIA = Net Compensation of Employees + Net Income From Property and Entrepreneurship + Net Retained Earnings

If you have any doubts you can also refer to the video link given below.

https://www.youtube.com/watch?v=pJit9JoYGYg&t=42s

Your assignment for the day

Calculate NFIA in the following cases

1)i) Factor Income From Abroad =Rs 500 ii) Factor Income to Abroad = Rs 300

      NFIA = Factor income from Abroad- Factor income to Abroad

      NFIA =        Rs  ( 500 - 300)

      NFIA =        Rs 200

2) i) Factor income from Abroad = Rs 250  ii) Factor income to Abroad = Rs 620

3) i) Factor income to Abroad  =Rs 150 calculate NFIA

4) i) Factor income to Abroad  = Rs -150 calculate NFIA