Theory of Income Distribution

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Theory of Income Distribution

Factors of production, labour, land, capital, etc. working in cooperation with each other produce annually a certain volume of goods and services. The market value of all these goods and services produced annually, when summed up without double counting, gives an estimate of national product or national income. Logically, all the factors that contribute to producing this income have a claim on it. So, each factor is paid its share of national income by way of factor reward or factor income. Thus, land gets rent, labour gets wages, capital gets interest and profit is claimed by the entrepreneurs. How much each factor gets or share of each factor in national income depends on factor price and quantity of the factor employed. Thus, the theory of factor determination is also called the theory of distribution.

Functional Distribution of Income

The term distribution theory refers to the theory that explains how total national income is divided among various persons or classes. When we study income distridution among various social groups, such as labour, landlords and capitalists, it is called functional distribution of income. When we study income distribution among groups of individuals, irrespective of the fact whether income is earned as a landlord or a labourer or capitalist, this is called size distribution or personal income distribution.

Since, in the days of early classical economists, Adam Smith and David Ricardo, society comprised of three main social classes, landlord, workers and capitalists, their main focus was to understand how income was distributed between reinters, wage earners and profit earners. Thus, the main interest of the economists was to explain rewards caused social inequalities. Functional distribution of income thus looks at the source of income earned by distinct social groups of landlords, capitalists or workers. If we say that labour has 60 per cent share in national income while the remaining 40 per cent goes to landlord and capitalists, this is functional distribution of income.

Size Distribution of Income

However, when we study how income is distributed among groups of individuals, it is called size distribution. Thus, in typical underdeveloped countries, top 10 per cent people may have over 30 per cent share in national income while bottom 20 per cent may just claim 5 per cent of this income. Or, the share of the bottom 40 per cent people may be just about 10 per cent while that of top 20 per cent may be over 50 per cent. This is called size distribution because it relates income share to size of the income group, lowest 20 per cent, next 20 per cent or top 20 per cent, etc. size distribution of national income is now the focus of most of the studies because efforts are being made to reduce these income inequealities through various policy measures.


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