What is factor income? Definition and examples

Factor Income is income we receive from at least one of the four factors of production. The factors of production are the building-blocks of the economy. Factors of production are the inputs we use to produce things so that we can make a profit.

The application and significance of these factors can vary widely in different economic systems, from free markets to planned economies, affecting how factor incomes are generated and distributed.

Economists divide the factors of production into four different categories: Land, Labor, Capital, and Enterprise.

Each factor of production, when we put it into use, provides us with an income, i.e., a factor income.

BusinessDictionary.com has the following definition of the term:

“Returns received on factors of production: rent is return on land, wages on labor, interest on capital, and profit on entrepreneurship.”

Do not confuse the term with ‘transfer income.’ Transfer income is income received without providing any service or good in return. Gifts, subsidies, and donations, for example, belong to the transfer income category.

Factor Income
According to Wikipedia: “Factor Income is income derived from selling the services of factors of production.”

Factor income from four factors

  • Land

Land is a factor of production. It also includes anything that comes from the land such as a natural resource or agricultural production.

Forests, coal, copper, oil, and natural gas, for example, belong to the common land or natural resources category.

Economists say that land’s factor income is rent.

  • Labor

Labor, in this context, refers to workers’ efforts in the creation of goods and services.

When you order a meal in a restaurant, for example, labor includes everything the waiter, chef, and bartender do.

Any human who has received payment for work has contributed labor resources to the production of things.

Labors factor income is wages, i.e., the money people receive for the work they have done.

For most people, their largest source of income comes in the form of wages.

  • Capital

Capita includes building, tools, machines, and vehicles. It includes every element that we use to produce things. Delivery vehicles, conveyor belts, hammers, and forklift trucks, for example, are items of capital

What kind of work we do determines the type of capital we use. A teacher, for example, uses textbooks, computers, a whiteboard, and desks to deliver education services.

Doctors, on the other hand, use stethoscopes, thermometers, and an examination room to deliver medical services.

Capital’s factor income is interest.

  • Enterprise

Enterprise or entrepreneurship is what we require to combine the other three factors of production. The entrepreneur uses capital, labor, and land to produce goods or deliver services.

A good entrepreneur will use the factors of production to make a profit. Hence, the factor income of enterprise is profit.

In the contemporary economy, technology is often considered a fifth factor of production, essential for maximizing efficiency and productivity in the use of Land, Labor, Capital, and Enterprise.

Example Sentences

Below are example sentences that illustrate how the term “factor income” is used within a sentence or specific context:

  1. “The concept of ‘factor income’ is integral to understanding how wealth is generated from different production inputs.”
  2. “When calculating national income, economists aggregate the ‘factor income’ from land, labor, capital, and entrepreneurship.”
  3. “Individuals earn ‘factor income’ through the provision of resources or services within the production process.”
  4. “In my economics class, we learned that ‘factor income’ includes wages, rent, interest, and profits.”
  5. “The country’s rise in ‘factor income’ indicates a robust growth in its production capabilities and resource utilization.”
  6. “Her investment portfolio’s dividends and interests are considered ‘factor income’ because they are returns on capital.”
  7. “The government policy aimed at redistributing ‘factor income’ more equitably across the economic spectrum.”

Video – What is Factor Income?

This video presentation, from our YouTube partner channel – Marketing Business Network, explains what ‘Factor Income’ means using simple and easy-to-understand language and examples.