Net Foreign Factor Income (NFFI)

Key takeaways
* NFFI is the difference between a country’s gross national product (GNP) and its gross domestic product (GDP): NFFI = GNP − GDP.
* NFFI measures net income earned by residents and firms abroad minus income earned in the country by foreign residents and firms.
* For most large economies NFFI is small because inflows and outflows largely offset; it can be substantial for smaller economies with large foreign investment or for countries with significant cross‑border corporate ownership.
* NFFI can affect how well GDP reflects national welfare: large negative NFFI means a country’s domestic output benefits foreign owners more than its own citizens.

Definition and formula
* Net Foreign Factor Income (NFFI) = Gross National Product (GNP) − Gross Domestic Product (GDP).
* In words, NFFI equals the aggregate income earned abroad by a country’s residents and firms minus the aggregate income earned within the country by foreign residents and firms.

GNP versus GDP (why they differ)
* GDP measures total production that occurs within a country’s borders, regardless of who owns the productive assets.
* GNP measures production attributable to a country’s residents and firms, regardless of where that production occurs.
* Example: Output from a Japanese firm’s factory in the United States counts toward U.S. GDP and Japan’s GNP.

When NFFI matters
* Small or open economies with large foreign direct investment can show sizable (often negative) NFFI because profits are repatriated to foreign owners.
* Countries with many citizens working and earning abroad (remittances) can have positive NFFI.
* Increasing globalization—cross‑border ownership, multinational firms, and labor mobility—can raise the importance of NFFI for understanding how domestic production translates into income available to residents.

Interpreting NFFI
* Positive NFFI: residents and domestic firms earn more abroad than foreigners earn domestically; GNP > GDP.
* Negative NFFI: foreigners earn more domestically than residents earn abroad; GNP < GDP.
* A large negative NFFI implies a substantial share of domestic production accrues to nonresidents rather than to resident households or firms.

Limitations and context
* Neither GDP nor GNP (and by extension NFFI) captures unpaid work, informal activity, distribution of income, or environmental costs; they are limited measures of welfare.
* NFFI is an accounting gap between two aggregates — it helps explain differences between measures of output and measures of resident income, but it doesn’t by itself reveal distributional or nonmarket effects.

Bottom line
NFFI provides a concise indicator of how much national income flows across borders relative to domestic production. While often small for large economies, it can be economically meaningful for smaller, highly globalized countries or when cross‑border corporate profits and remittances are large. Understanding NFFI helps clarify whether domestic output primarily benefits a country’s residents or accrues to foreign owners.