This is the notes from NIOS Economics : Income Flows. This article will be useful for all those IAS aspiring candidates who want to brush up their concepts dealt in this chapter. I have tried to include all the important points mentioned in the chapter and have made efforts to summarize them as much as I could. However, you are highly recommended to refer to the Economics books by NIOS since they are very important for forming your basic concepts and lot of questions are asked in the CSAT Prelims from these chapters. Have a Happy Learning!

Types of Income:

1. Factor Income
2. Non Factor Income

Factor Income:

Factor means factor of production which are of 4 types:
1. Land
2. Labour
3. Capital
4. Entrepreneurship
It is the production unit which generates the factor of income with the help of the above four.

Owners of the above factors of production sell services of their factors to the production units> the production units pay the price for the factor services > this price is the factor cost to the production unit and factor income to the owner of factor of production.

Factor income is the income accruing to the owner of a factor of production in return for the services rendered to the production unit.

There are four types of factor income in the form of wages, rent, interest and profits.

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Non Factor Income:

These are the incomes in which there is not any kind of factor service involved in getting the income. These are also termed as transfer incomes as merely transfer of money is involved without providing any goods or services. E.g.: gifts, charities, donations, taxes, fines, etc.

National Income includes only factor income.

4 factors of production:

Labour:

It includes all the physical and mental efforts of human beings used for producing goods and services.
The remuneration paid to the workers is known as wages and salaries.

In National Income Accounting, it is termed as Compensation of employees.

Land:

The alternative term is natural resources. It includes all that is given free to us by nature.

In National Income Accounting, the remuneration accruing to the land owner is termed as rent.

Capital:

All man-made assets used for producing goods or services like structures of land, machines, equipments, stock of materials, etc.

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In National Income Accounting, the remuneration accruing to the capital is termed as interest.

Entrepreneurship:

It refers to the initiative taken by a person or groups of persons (known as entrepreneur) in starting and organizing a business and takes the credit for all the good and bad consequences.

In National Income Accounting, the remuneration accruing to the entrepreneur owner is termed as profit.

Basic function of Factor of Production is to produce goods and services for which it incurs cost on:

a) Purchasing goods and services from other production unit

b) Hiring the services of four factor of production.

The cost incurred are divided as :

1) Intermediate cost

2) factor cost- factor income generated by the production unit.

The use of goods and services for satisfaction of want is called consumption. These are food items, clothing, furniture, etc.

Acquiring goods and services for the use in other production processes is called Capital Formation or Investment. Examples are machines, equipments, materials, etc.

There are thus 3 economic activities namely:
1. Production
2. Consumption
3. Investment

Any sale of goods and services includes 2 types of flow:

Real Flow: The flow of goods and services from seller.

Money flow: The flow of money from buyer.

Both the real and money flow takes place continuously in every economy.

Open Economy: Term used for a country which has economic relations with the rest of the world.

Closed Economy: Term used for a country which has no economic relations with the rest of the world.

Consumer sector is divided as:

Household sectors: comprises of all the families and individuals who purchase or acquire goods and services for personal satisfaction of their wants. Household spend on consumption keeping in mind personal and family welfare.

Government: all government departments providing free services to the people. Such government departments are called General Government. Government spends on consumption keeping in mind public or social welfare.

Capital sector: Borrowing and lending activities.

Economy is classified into 5 basic sectors:

1. Production Unit

2. Household

3. General Government

4. Capital Sector

5. Rest of the World

References:

NIOS Economics Book