Factor income (also calledprimary income andearned income) is the flow ofincome that is derived from thefactors of production, i.e., the general inputs required to produce goods and services. Factor income on the use ofland is calledrent, income generated fromlabor is calledwages, and income generated fromcapital is divided between profit forequity owner andinterest for creditor. The total amount of factor income received by the residents of a country is referred to as thenational income, while factor income andcurrent transfers together are referred to asdisposable income.[1]
In contemporarynational accounting,Indirect taxes minus subsidies are treated like factor income despite not meeting the definition. In earlier system like the1953 SNAdefined to concept of GDP : the sum of all factor income called GDP at factor cost, and the sum of all expenditure called GDP at market price. (GDP at market price = GDP at factor cost + Indirect taxes minus subsidies). Factor cost measured have being abandoned by the SNA.
Factor income is used to analyzemacroeconomic situations and to find out the difference betweengross domestic product andgross national income : difference between the total value of the goods and services produced in a country and the income of the citizens of the country.
The applicability of the concept of factor income can be seen indeveloping countries where large portion of their income is from foreign direct investment which creates a massive gap between gross domestic product (GDP) and gross national income (GNI), with GDP being higher than GNI.
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