What are the factor incomes in Macro Economics?

Question

I have a simple doubt. Why do we consider only land, wages and capital goods while calculating the total factor incomes? A non resident in a country also produces goods then why are the values of the goods finally produced not taken into account while calculating the factor incomes?

Answer 1

It's pretty straight forward. The difference is in national income calculation. Think of the "GDP versus GNP" argument.

This argument debates "what is national wealth?". Is it the amount of money that citizens make or residents make?

Under the factor incomes approach, you look at the domestic goods that are consumed (e.g. land, salaries, working capital, raw material) plus a profit to determine domestic product. You aggregate that to derive GDP. That is, you find out how much money resident are making.

Let's take an example. Let's say there is a hypothetical pineapple growing company in Costa Rica owned by Americans. Let's say they sell US$100m in pineapples, US$10m goes to local wages, $40m in other costs and US$50m in profits. How much money is the Costa Rica making? Is it the US$10m paid to workers? Is it the US$50m in profit that flows back to the US shareholders?

Here's another example. In this case, it's real. The Philippines made PP19,329 per person in GDP and PP21,182 GNP. GDP grew by 7.1% and GNP grew by 8.3%. What is more important? The Phillipines has a huge expatriate community of nurses, domestic workers, construction personnel and people working abroad who repatriate money. In this case, GNP is extremely important. In most other places, GDP is what is looked at because it is what the "local economy" is doing (i.e. economy in the US versus the economics of Americans).

Answer 2

because that is what factor income is... it can be contrsted with foreign factor income which is the proportion non-residents produce