Definition of factor income

0

What is factor income?

Factor income is the flow of income that is derived from factors of production, the general inputs required for the production of goods and services.

The income from factors on the use of land is called rent, income generated by labor is called wages, and income generated by capital is called profit. The factor income of all normal residents of a country is called national income, while factor income and current transfers together are called private income.

Key points to remember

  • Factor income is the income received from the factors of production: the resources used to produce goods or services.
  • The income from factors on the use of land is called rent, income generated by labor is called wages, and income generated by capital is called profit.
  • Factor income is most often used in macroeconomic analysis, helping governments determine the difference between gross domestic product (GDP) and gross national product (GNP).
  • It can also be used to expose disparities in income distribution.

What does the factor in funding mean?

How factor income is used

Factor income is most often used in macroeconomic analysis, helping governments determine the difference between gross domestic product (GDP), the monetary value of all finished goods and services produced within the borders of a country during a given period, and the gross national product (GNP), the market value of all final goods and services produced during a given period by residents of a country. In other words, governments want to know how much revenue is generated domestically and how much revenue is generated by citizens abroad.

For most countries, the difference between GDP and GNP is small, as the income generated by citizens abroad and by foreigners at the national level often compensates for each other. A large difference in factor income is more likely to be found in small developing countries, where a significant portion of income can be generated through foreign direct investment (FDI).

The proportional distribution of factor income among factors of production is also important in the analysis at the country level. Sparsely populated but mineral-rich countries may see a low proportion of factor income from labor, but a high proportion from capital. Meanwhile, agriculture-focused countries may experience increased incomes from land-derived factors, although poor harvests or falling prices may lead to declines.

Important

Industrialization and increased productivity usually lead to rapid changes in the distribution of factor income.

Special considerations

Examining factor income can be one way to understand the causes of periods of inequality in income distribution. For example, if a country experiences rapid technological advancement followed by a shift to industrialization, the factor income balance will shift, at least for a time, from labor to capital. This is especially pronounced if the country depended on traditional labor for the long term to provide private income.

The introduction of technology that does not use such a labor force, or depends only partially on it, means that capital investments in the technology can scale up considerably. As these old forms of work were phased out, income inequalities would widen.

Wages could drop dramatically for the workforce during such a transition. Over time, people can move to generate personal income through industrialization opportunities; however, there will likely be a period when only a selected portion of the population will be able to tap into the capital generated. The degree of change brought about by industrialization can have a direct effect on changes in factor income.


Source link

Leave A Reply

Your email address will not be published.