Net factor income is the difference between factor income paid overseas and factor revenue received abroad. The four factors of production are land, labor, capital, and entrepreneurship; their revenue is referred to as factor income. An essential part of the current account is the net factor income.
What Is Net Factor Income?
• The difference between factor income obtained overseas by a country's inhabitants and factor income earned on the domestic territory of that country by non-residents is known as net factor income from abroad.
• According to economic theory, the four components of production are labor, land, capital, and entrepreneurship.
• Each of these components earns factor income as a return on its investment in the output.
• Compensation of Employees is paid to the workforce, Land Rent is paid to the landlord, Dividends or Interest are paid to the capital owner (shareholder or lender), and the remaining funds are given to the business.
• The CSO describes it as "income attributable to factor services rendered by ordinary residents of the country to the rest of the world, minus factor services rendered to them by the rest of the world."
These are its three primary parts:
• Employee net compensation.
• Rent, interest, and profit from real estate and business.
• Net retained profits of foreign-based residents.
• Net factor income is calculated as follows: Net employee remuneration + Net rental and business revenue from abroad + net retained earnings of resident enterprises abroad.
• Net factor income from abroad can be both positive and negative, it should be recognised. When foreigners' income from our nation exceeds our income from overseas, the situation is negative; nevertheless, when the opposite is true, it is positive.
Symbolic Representation of Net Factor Income
• Net Factor Income is the difference between inhabitants' domestic factor income and their foreign factor income.
• Normal citizens of a nation generate factor income both within and outside of its domestic region.
• Due to the fact that foreigners make money by operating on the home soil of other nations, it is a two-way street.
In order to generate more money, the following components of production might be used:
Components of Net Factor Income
Compensation of employees
• Working in the domestic areas of other nations and earning wages and salaries there qualifies as earning work-related income (also known as compensation of employees).
• For instance, let's say that in a given year, resident Indian scientists, engineers, and physicians employed abroad received factor income totaling Rs 5,000 crore, whilst non-resident employees employed within Indian Territory received payments totaling Rs 3,000 crore. A net pay of Rs 2,000 (5,000–3,000 crore) would be paid to workers from other nations in India.
Property and entrepreneurial income
• Owning real estate (such as homes, offices, and factories, as well as financial assets like bonds and shares abroad) can also result in significant income from abroad because it brings in rent and interest.
• Entrepreneurial activities like creating goods and services can also result in profit.
Net Retained Earnings of Resident Companies Abroad
• Retained earnings are actually an organization's undistributed profit.
• Imagine, for instance, that in a given year, Indian businesses operating abroad kept a balance profit of Rs. 2,000 crore after paying profit tax and distributing dividends from their overall profits, whereas overseas businesses operating in India kept a profit of Rs. 1,000 crore. Net retained earnings of resident enterprises abroad would be Rs 1,000 (2,000-1,000) crore.
• The distinction between national and domestic income is made using the net factor income from overseas.
• By combining domestic income and net income from outside, we may calculate national income.
• GNP minus Net Factor Income equals GDP.
• Regardless of whether production is held by a domestic or foreign enterprise, GDP refers to all economic output that occurs domestically or within a nation's borders.
• GNP measures the production of all firms and individuals operating within or outside of a nation.
• Thus, the difference between a country's gross national product (GNP) and gross domestic product (GDP) is known as net factor income.
• The difference between GNP and GDP will be much lower if remitted profits are particularly high compared to income from the nation's assets and citizens living abroad.
Being able to move across borders more freely than in the past may make Net Factor Income more significant in a globalized economy. Because payments provided to natives and those made to foreigners roughly balance each other out, Net Factor Income is often negligible in most countries. However, because their GDP will be fairly high in comparison to GNP, the impact of Net Factor Income may be large in smaller nations with significant foreign investment in relation to their economies and little assets outside.