Functional distribution of income
Also called: Distribution of national income, Factor shares · Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 11, Ch 1 "Introduction (Statistics for Economics)"
Meaning
Functional distribution of income is the division of national income into the payments made to each factor of production (an input used to produce goods). The four factor shares are:
- wages for labour
- rent for land
- interest for capital
- profit for entrepreneurship
It shows how much of the income created by production goes to each factor. The income method of measuring national income adds up these shares.
Example
A cotton farm and a cloth mill together create ₹200 of value added. Of this, wages are ₹80 (20 + 60) and profits are ₹120 (30 + 90). So the functional distribution is 40% to labour and 60% to profit.
Don't confuse with
- Personal (size) distribution of income: this shows how income is shared among people, rich and poor. The functional distribution shows how income is shared among factors. One person can earn both wages and interest.
Related concepts
- Expenditure method
- Final expenditure
- Open economy national income identity
- Private Final Consumption Expenditure
- Government Final Consumption Expenditure
- Gross Fixed Capital Formation
- Valuables
- Statistical discrepancy
- Income method