What Is Net Foreign Factor Income (NFFI)?
Let me explain what Net Foreign Factor Income (NFFI) is—it's simply the difference between a nation’s gross national product (GNP) and its gross domestic product (GDP).
Key Takeaways
- Net foreign factor income (NFFI) is the difference between a nation’s gross national product (GNP) and gross domestic product (GDP).
- NFFI is generally not substantial in most nations since payments earned by citizens and those paid to foreigners more or less offset each other.
- NFFI may assume increasing importance in a globalized economy, as people and companies move across international borders more easily than they did in the past.
Understanding Net Foreign Factor Income (NFFI)
You should know that NFFI is the difference between the total amount that a country’s citizens and companies earn abroad and the total amount that foreign citizens and overseas companies earn in that country. In mathematical terms, it's NFFI = GNP - GDP, where GNP stands for gross national product and GDP for gross domestic product.
The NFFI level is generally not substantial in most nations because payments earned by citizens and those paid to foreigners more or less offset each other. However, NFFI's impact may be significant in smaller nations with substantial foreign investment relative to their economy and few assets overseas, since their GDP will be quite high compared to GNP.
GDP refers to all economic output that occurs domestically or within a nation’s boundaries, regardless of whether a local company or foreign entity owns the production. GNP, on the other hand, measures the output from the citizens and companies of a particular nation, regardless of whether they are located within its boundaries or overseas. For example, if a Japanese company has a production facility in the U.S., its output will count toward U.S. GDP and Japan’s 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 GDP provided a more straightforward comparison of other measures of economic activity in the United States and that it would be helpful to have a standard measure of economic output—most other countries at the time had already adopted GDP as their primary measure of production.
Special Considerations
Many economists have questioned how meaningful GNP or GDP is as a measure of a nation's economic well-being since they do not count most unpaid work while counting economic activity that is unproductive or destructive.
Several economists still criticize GDP, specifically for providing a somewhat misleading picture of an economy's true health and the well-being of its citizens. This is because GDP does not take into account the profits earned in a nation by overseas companies that are remitted back to foreign investors. If these remitted profits are very large compared with earnings from the nation’s overseas citizens and assets, the NFFI figure will be negative, and GNP will be significantly below GDP.
NFFI may assume increasing importance in a globalized economy, as people and companies move across international borders more easily than they did in the past.
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