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The concept of factor income is a common one in macroeconomics. It relates to the circular flow model of the economy. This model shows all economic activity as flows between four stocks: households, firms, government, and the rest of the world. These flows travel through three different markets: resource markets, goods and services markets, and financial markets.

This is a simple model that assumes households to own all resources and for all production to be carried out by the firms. Factor income is the flow that exists between firms and households. It consists of the total amount paid by firms to households for wages and salaries, rent, interest, the net income of unincorporated enterprises, and corporate profits (before taxes).

If we add to factor income the value by which capital has depreciated as well as the cost of indirect business taxes like the Canadian GST or the British VAT, then we have a value equal to GDP measured according to the income approach.

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