Net Factor Income from Abroad

Money crosses borders in both directions as payment for factors of production — for labour, and for capital. Indians working overseas earn salaries. Indian companies earn profits from foreign subsidiaries. In the other direction, multinationals operating in India send dividends home and foreign lenders collect interest.

Net factor income from abroad is what is left after netting the two. It is a small number sitting between two enormous ones, and it is the only thing separating GDP from GNP.

The workbook gives the definition in one line: NFIA is the income received by the residents minus income paid to non-residents, and it is the difference between GDP and GNP.

The word doing the work is factor. This is income earned by supplying labour or capital — wages, rent, interest and profit. It is not the value of goods exported, which is already inside GDP through net exports in the expenditure method.

The sign carries information. A country that imports capital — that hosts more foreign-owned production than its residents own abroad — pays out more than it receives and runs a negative NFIA, so its GNP is below its GDP. A country whose residents work and invest abroad on a large scale runs the reverse.

For a research analyst the practical point is where a company's earnings come from. A firm whose profit is generated by overseas subsidiaries contributes to India's GNP through NFIA while adding little to India's GDP — and its reported consolidated profit answers to foreign demand and the exchange rate, not to Indian demand.

NFIA = Factor income received by residents from abroad
     − Factor income paid to non-residents

GNP  = GDP + NFIA
NFIA = GNP − GDP

Build it from its parts, for an illustrative year.

Received by Indian residents from abroad

Paid to non-residents

NFIA = 5.20 − 8.60 = − Rs 3.40 lakh crore

Against a GDP of Rs 300 lakh crore, NFIA is −1.13%, and GNP is Rs 296.60 lakh crore.

Notice how much traffic produced how small a net figure: Rs 13.80 lakh crore crossed the border in the two directions to leave Rs 3.40 lakh crore of difference. A change in either gross flow — a surge in repatriated profits, or a fall in overseas earnings — moves NFIA far more sharply than it moves GDP.

Chapter 5 (section 5.3.1) introduces NFIA in the same paragraph as GDP and GNP, as the quantity that reconciles them. Expect it as the answer to "what is the difference between GDP and GNP", and as a component in a simple arithmetic question converting one into the other.

• NFIA = GNP − GDP, not GDP − GNP. Get the direction wrong and the sign flips on every answer.
• It is a net figure. Large flows in both directions can leave a small NFIA; the gross numbers say nothing on their own.
• It is factor income — wages, rent, interest and profit. The value of exported goods is not factor income; net exports are already inside GDP by the expenditure method.
• NFIA is not the trade balance and not the current account. They are different statements measuring different things.
• For India it is normally negative, so GNP is normally below GDP. An exam option asserting GNP always exceeds GDP is wrong.
• Residence, not citizenship, is the test. The workbook uses "residents (nationals)"; the national accounts concept turns on where a person or entity is resident.