What is Net Foreign Factor Income (NFFI)?
Net Foreign Factor Income (NFFI) is the difference between a country’s gross national product (GNP) and its gross domestic product (GDP).
Key points to remember
- The net foreign factor income (NFFI) is the difference between the gross national product (GNP) and the gross domestic product (GDP) of a country.
- The NFFI is generally not substantial in most countries, as the payments received by citizens and those paid to foreigners more or less offset each other.
- NFFIs can become increasingly important in a globalized economy as people and businesses cross international borders more easily than in the past.
Understanding Net Foreign Factor Income (NFFI)
The NFFI is the difference between the total amount that a country’s citizens and businesses earn abroad and the total amount that foreign citizens and foreign businesses earn in that country. In mathematical terms:
NOTFFI = gNOTP – gDPgNOTP=Gross national productgDP=gross domestic product
The NFFI level is generally not important in most countries, as the payments received by citizens and those paid to foreigners more or less offset each other. However, the impact of NFFI can be large in small countries with substantial foreign investments relative to their economy and few assets abroad, as their GDP will be quite high relative to GNP.
GDP refers to all economic output that occurs nationally or within a country’s borders, whether or not a local business or foreign entity owns the output. GNP, on the other hand, measures the output of citizens and businesses in a given country, whether located within its borders or abroad. For example, if a Japanese company has a production plant in the United States, its output will count towards US GDP and Japanese GNP.
GDP is the most widely accepted measure of economic output, having supplanted GNP around 1990. In making the switch, the Bureau of Economic Analysis (BEA) said that GDP offered a more direct comparison to other measures of economic output. economic activity in the United States and that it would be useful to have a standard measure of economic output – most other countries at the time had already adopted GDP as the primary measure of output.
Many economists have questioned the importance of GNP or GDP as a measure of a country’s economic well-being, as they do not count most unpaid work while counting unproductive or destructive economic activities.
Several economists still criticize the GDP, in particular because it gives a somewhat misleading image of the true health of an economy and the well-being of its citizens. Indeed, the GDP does not take into account the profits made in a country by foreign companies which are returned to foreign investors. If these remitted profits are very large compared to the income of the country’s citizens and overseas assets, the NFFI figure will be negative and the GNP will be significantly lower than the GDP.
NFFIs can become increasingly important in a globalized economy as people and businesses cross international borders more easily than in the past.