Amy Farzana

NFIA and its components

Income generated within the domestic territory of a country is domestic factor income. By
rendering factor services abroad, the residents of a country can earn income from abroad.
Similarly non-residents can supply factor services in one’s own country and can earn income
from our country.

The difference between the income received from abroad for rendering factor services and the
income paid for factor services rendered by foreigners is called net factor income from abroad.

Components of NFIA: It consists of

(a) Net compensation of employees (b) Net compensation from property and
entrepreneurship © Net retained earnings

(a) Net compensation of employees: It considers the compensation of employees received

by a resident worker employed abroad temporarily AND the payments made to a non-
resident who is temporarily employed within the domestic territory of a country.

(b) Net income from property and entrepreneurship is the difference between rent ,
interest and profits received by a resident and similar payments made to non -
residents.
(c) Net retained earnings consists of the difference between retained earnings of a
resident company abroad and the retained earnings of foreign company in India.

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Amy Farzana

Problem of Double Counting

The problem of double counting is the problem of counting the value of a commodity more
than once in calculating the national income of the country.

This can be explained by the following example.

Items Value of Intermediate Value Added

output consumption
Farmer 100 0 100
Miller 150 100 (raw material) 50
Baker 300 150 (raw material) 150
Retailer 350 300 50
900 550 350

In the above example, the farmer produces wheat with Rs.100 assuming that he has not
spent on intermediate inputs.

The farmer sells the wheat to the miller at Rs.100 who converts it into flour and sells it to
the baker at Rs. 300.

The baker makes bread and sells it to the retailer at Rs.350.

If we include the value of all the above while estimating income, the value of wheat is
included 4 times. This is called double counting.

It can be avoided by following.

(i) Value added method – considering the sum of value added by each producer (350
total value added)
(ii) Final output method – by considering the value of final goods. (350-final good
retailer)

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