Net foreign income

Definition

Net foreign income refers to the total income earned by a country’s residents from foreign sources, minus the income earned by foreign residents within that country.

What is net foreign income?

Net foreign income is a measure of the net flow of income between a country and the rest of the world, reflecting the earnings from international trade, investment, and other economic activities.

Net foreign income consists of various components, including:

• Exports and imports: Income earned from exporting goods and services to foreign countries and income paid for importing goods and services from foreign countries.
• Foreign investment: Income earned from foreign direct investment, portfolio investment, and other financial transactions with foreign organisations.
• Remittances: Income received from foreign workers sending money back to their home country (remittances) and income paid to foreign workers within the country.
• Interest, dividends, and royalties: Income earned from interest on foreign loans, dividends from foreign investments, and royalties from the use of intellectual property rights abroad.

The formula for calculating net foreign income is:

Net Foreign Income = Total income from foreign sources − Income earned by foreign residents

Net foreign income is an important indicator of a country’s economic relationship with the rest of the world. A positive net foreign income indicates that a country is earning more from its international activities than it is paying out. Conversely, a negative net foreign income suggests that a country is paying out more income to foreign organisations than it is earning.

Example of net foreign income

Let’s consider a country called “Nation A.” In a given year, Nation A’s residents earn £500 million from foreign investments, receive £200 million in remittances from citizens working abroad, and export goods and services totalling £1 billion. 

However, during the same period, foreign residents earn £300 million from investments within Nation A and remit £150 million back to their home countries.

Now we can calculate the net foreign income:

Total income from foreign sources = £500 million + £200 million + £1 billion = £1.7 billion

Income earned by foreign residents in Nation A = £300 million + £150 million = £450 million

Net foreign income for Nation A = £1.7 billion – £450 million = £1.25 billion

Therefore, the net foreign income for Nation A in the given year is £1.25 billion. This represents the overall surplus of income earned by Nation A’s residents from their international activities after accounting for the income earned by foreign residents within the country.