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 R500 million from foreign investments, receive R200 million in remittances from citizens working abroad, and export goods and services totalling R1 billion. 

However, during the same period, foreign residents earn R300 million from investments within Nation A and remit R150 million back to their home countries.

Now we can calculate the net foreign income:

Total income from foreign sources = R500 million + R200 million + R1 billion = R1.7 billion

Income earned by foreign residents in Nation A = R300 million + R150 million = R450 million

Net foreign income for Nation A = R1.7 billion – R450 million = R1.25 billion

Therefore, the net foreign income for Nation A in the given year is R1.25 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.