National Income As Aggregate Of Factor Incomes


A production unit is formed by the four factors of production, land, labour, capital and entrepreneurship. During production process they generate income. This generated income is known as Net Value Added AT Factor Cost (NVAFC). Net value added at factor cost is distributed among the owners of four factors of production in the form of following factor incomes.

  • (a) Compensation of employees
  • (b) Rent
  • (c) Interest
  • (d) Profit
  • (e) Mixed Income of self-employed

Compensation of employees

Compensation of employees includes all monetary and non-monetary benefits that accrue to the employees on account of labour services rendered by them in the production process. The employees get wages or salaries. In addition they may get many other benefits as employees like bonus, employer’s contribution to provident fund, free accommodation, free conveyance, free medical facilities, free holiday trips, etc.

Rent

It is a factor income earned from lending the services of buildings and subsoil assets for production of goods and services.

Interest

Interest is the income earned by those who provide funds to the production units. Any interest payment against loans given to consumers to meet consumption expenditure is not a factor payment and so can not be treated as factor income.

Profit

Profit is the income accruing to the entrepreneur for his entrepreneurial services (i.e. bearing risks and uncertainties in the business) to the production units. It is a residual income left after making factor payments out of the value added in the form of compensation of employees, rent and interest.

Mixed Income of self-employed

Mixed income of self-employed is the income generated by self employed persons like doctors, lawyers, farmers, shop keepers etc. A self employed person provide his labour as well as his property in his work and generally does not keep accounts in a manner so that the factor payments are clearly identified. For example, a small shopkeeper starts his business in his own house employing his own labour and capital. Hence, the income of this small shopkeeper will be termed as mixed income of self employed.

National Income As Aggregate Of Factor Incomes

National Income = Compensation Of Employees
+ Rent
+ Interest
+ Profit
+ Mixed Income
+ Net Factor Income From ROW.

OR

National Income = Net Domestic Product At Factor Cost (NDPFC)
+ Net Factor Income From ROW.

.

Bibliography : NIOS – Economics

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