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.