Factor incomes
Also called: Factor payments, Primary income · Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Class 12, Ch 1 "Introduction (Macroeconomics)"; Class 12, Ch 2 "National Income Accounting"
Meaning
Factor incomes are the rewards paid to the four factors of production for their part in making goods and services. Land earns rent, labour earns wages, capital earns interest, and entrepreneurship earns profit. Profit is a residual, meaning what is left for the owner after rent, wages and interest are paid. All factor incomes together equal the value added by a firm. For the whole economy, they add up to Net Domestic Product at factor cost. How national income is split among these four rewards is called the functional distribution of income.
Example
Ratna's restaurant, Pause Point, sells meals worth ₹12 lakh and spends ₹4 lakh on ingredients and gas, so its value added is ₹8 lakh (ignoring depreciation). She pays rent of ₹1.2 lakh, wages of ₹4.2 lakh and interest of ₹0.6 lakh, a total of ₹6 lakh. The ₹2 lakh left over is her profit.
Don't confuse with
- Sales revenue: revenue also covers the cost of inputs bought from other firms. Factor incomes add up only to value added.