Factor Income

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DEFINITION of 'Factor Income'

Income received from the factors of production – land, labor, and capital. Factor income on the use of land is called rent, income generated from labor is called wages and income generated from capital is called profit. The factor income of all normal residents of a country is referred to as the national income, and factor income plus current transfers is referred to as private income.

BREAKING DOWN 'Factor Income'

Factor income is most commonly used in macroeconomic analysis, and helps governments determine the difference between Gross Domestic Product and Gross National Product. For most countries the difference between GDP and GNP is small, since income generated by citizens abroad and by foreigners domestically often offset each other. A large difference in factor income is more likely to be found in small, developing nations, where a significant portion of income may be generated by foreign direct investment.

The proportional distribution of factor income across the factors of production is also important in country-level analysis. Countries with low populations but great mineral wealth may see a low proportion of factor income stemming from labor, but a high proportion stemming from capital. Nations focusing on agriculture may see an uptick in factor income derived from land, though crop failures or declining prices may lead to decreases. Industrialization and increased productivity generally cause rapid shifts in factor income distribution.

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