Net foreign factor income??

Question

Hi

Our economics teacher never told us how to calculate Net foreign factor income. Can anyone tell me the formula to use?

http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=43&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2004&LastYear=2006&3Place=N&Update=Update&JavaBox=no

^^ That's the chart that we are supposed to be working with, and we are supposed to determine the NFFI for each year.

Can someone please explain how to do it?

Thanks

Answer 1

NET FOREIGN FACTOR INCOME:

    The difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production. Net foreign factor income (NFFI) is the key difference between gross DOMESTIC product and gross NATIONAL product in the National Income and Product Accounts maintained by the Bureau of Economic Analysis. It is also an important difference between NATIONAL income and gross (and net) DOMESTIC product.

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 Product

Net 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.

Net Investment = Gross Investment - Depreciation

NDP = GDP - Depreciation

National Income = NDP - Net Foreign Factor

Net foreign factor income is a record of all transactions between residents of a country (both the private and public sectors) and the rest of the world. It is divided into current and capital accounts.

The CURRENT ACCOUNT represents national income and national expenditure. It is composed of visible trade (.e. trade in tangible goods and merchandise including re-exports) and

invisible trade (e.g. transportation, insurance and other services, interest payments, expenditure by tourists, and certain classes of government expenditure). Unrequited receipts, i.e. those receipts for which no consideration is given, may be included under "invisibles" or kept separate. These include payments made by migrant workers to their families at home and other gifts.

The CAPITAL ACCOUNT consists of capital inflows and outflows, both long term and short term, and includes intergovernmental loans. If current and capital accounts together are in deficit, there will be an outflow from the foreign exchange reserves.