Foreign factor income

From Hobson's Choice

Foreign factor income (FFI) is the sum of all factor payments to the owners of productive factors (such as land, labor, and capital), in which the factors are located abroad. Examples include rent from property overseas, remittances from overseas foreign workers, and profits from FDI.

Net foreign factor income is the sum of all returns to overseas factors, minus the sum of all returns to foreign owners of factors located domestically. In the NIPA statistics of the (US) Bureau of Economic Analysis, this is referred to as "net income receipts."

[edit]

FFI and Current Accounts

Residents of any nation A will own factors that are present in B, and vice versa. An interesting corollary to this is that foreign factor income may be represented as

FFI =

where r represents the rate of return on capital, KAB is the capital account balance, and δ = the rate of depreciation. Since the index of time (is negative, i.e., we are expressing "ten years ago" as -10, -t will always be a positive number. Assuming the rate of depreciation is 5% per year, capital investment that is ten years old will have a value of 60% its initial value.

As with the other components of the current account balance (CAB), there is income flowing abroad and income flowing inward. FFI is the net influx, which may well be negative.

[edit]