Question

Explain the components of ‘Net Factor Income from abroad’.

Hint:

NFIA has three components: net compensation of employees, net income from property and entrepreneurship, and net retained earnings. Each is income earned abroad minus income paid to non-residents.

Answer 1

Step 1: Recall the meaning:
Net Factor Income from Abroad (NFIA) is the income that normal residents of India earn from abroad minus the income that non-residents earn inside India.
In symbols, NFIA = factor income earned from abroad - factor income paid to the rest of the world.
It is the link between Domestic Product and National Product. It has three components.

Step 2: Component 1: Net Compensation of Employees:
It is the compensation earned by normal residents who work abroad, less the compensation paid to non-residents who work in the domestic territory.
For example, the salary of an Indian engineer in another country is added, and the pay of a foreign worker in India is deducted.

Step 3: Component 2: Net Income from Property and Entrepreneurship:
It is the rent, interest and profits that residents earn from abroad, less the same type of income paid to non-residents from the domestic territory.
Example: interest earned on a foreign bank deposit is added, and profit sent home by a foreign firm in India is deducted.

Step 4: Component 3: Net Retained Earnings:
It is the retained earnings (undistributed profits) of resident companies operating overseas, less the retained earnings of foreign companies operating in India.
A positive value means residents own more foreign assets than foreigners own here.

Final Answer:
NFIA has three parts: Net Compensation of Employees, Net Income from Property and Entrepreneurship, and Net Retained Earnings of companies.
NFIA = Net COE + Net income from property and entrepreneurship + Net retained earnings.