Factor income is the flow of income that is derived from the factors of production, which are the general inputs required to produce goods and services. Factor income is categorized based on the factor of production that generates it. For example, income generated from labor is called wages, income generated from the use of land is called rent, and income generated from capital is called profit. The factor income of all normal residents of a country is referred to as the national income, while factor income and current transfers together are referred to as private income.

Factor income is used to analyze macroeconomic situations and to find out the difference between gross domestic product (GDP) and gross domestic income, which is also the difference between the total value of the goods and services produced in a country and the net income of the citizens of the country. This helps the government understand the magnitude of income of the countrys citizens and the citizens living abroad. Factor income is most commonly used in macroeconomic analysis, helping governments to determine the difference between gross domestic product (GDP) and gross national product (GNP) .

In summary, factor income is the income received from the factors of production, which are the resources used to produce goods or services. It is categorized based on the factor of production that generates it, and it is used to analyze macroeconomic situations and to determine the difference between GDP and GNP.