What is 'Factor Income'

Factor income is 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.

How Factor Income Can Expose Disparities in Income Distribution

Examining factor income can be a way to understand the causality behind periods of inequality in income distribution. For example, if a country experiences a rapid advance in technology followed by a move into industrialization, the balance of factor income will shift, at least for a time, away from labor and more towards capital. This is especially pronounced if the country had a long-term reliance on traditional labor to provide private income.

The introduction of technology that does not utilize such labor, or only partially relies on it, means that capital investments into the technology may escalate drastically. As those older forms of labor are phased out, there would be widening income inequality. Wages may decrease significantly for labor during such a transition. Over time, the populace may shift to generate personal income through opportunities in industrialization, however there will likely be a period where only a select portion of the populace will be in a position to tap into the capital that is generated. The degree of change that industrialization brings can have a direct effect on factor income shifts.

RELATED TERMS
  1. Income

    Income is money that an individual or business receives on a ...
  2. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  3. Business Income

    Business income is a type of earned income, and is classified ...
  4. Factor Market

    A factor market is a marketplace for the services of a factor ...
  5. Income Investment Company

    A money management firm whose primary investment goal is to generate ...
  6. Personal Income

    Personal income is the total compensation received by an individual. ...
Related Articles
  1. Insights

    A Brief History of Income Inequality in the United States

    Income inequality is plaguing the U.S. economy, but a peek into the past reveals that the current situation is largely a result of government policy.
  2. Insights

    4 Forces Behind Income Inequality in America

    Two-thirds of U.S. households saw their income decline or stay flat between 2005 and 2014. A McKinsey report has taken an innovative look at this demographic.
  3. Managing Wealth

    Who's Getting Richer? Hardly Anyone

    Federal 'economic gains' mask the truth: Most Americans are doing worse, with average incomes in 2014 smaller than in 2000. Call it upward redistribution.
  4. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  5. Investing

    Learn to Value Real Estate Investment Property

    Make sure you know what your real estate investment is worth before you sign the ownership papers. Learn what capitalization rate means to your net operating income.
  6. Managing Wealth

    An Introduction To Factor Investing

    Factor investing delivers risk adjusted results that deliver the same or better investment returns as the overall market but with less risk.
  7. Financial Advisor

    3 Ways Retirees Can Generate Income from Investments

    It's not enough to have savings; those investments have to generate income to last through retirement. Here's how.
  8. Investing

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  9. Retirement

    Tax Strategies for Your Retirement Income

    Once you’re actually retired, consider these strategies to minimize taxes.
RELATED FAQS
  1. What is the difference between gross income and earned income?

    The difference between earned income and gross income is an important one come tax time. Read Answer >>
  2. Why are the Factors of Production Important to Economic Growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  3. What effect does the income effect have on my business?

    Learn if you should open or modify your existing small business based on the income effect. Learn if it would positively ... Read Answer >>
  4. What are the differences between gross profit and net income?

    Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center