Theory of distribution

Question 1

What is the theory of distribution?

Answer 1

This refers to the study of how total wealth or income generated in an economy is divided

Question 2

State the 2 approaches used in this theory.

Answer 2

The functional distribution of income
Size/personal distribution of income

Question 3

Explain the functional distribution of income

Answer 3

This is how income in an economy is divided among the different factors of production.

Question 4

What are the factors of production and state their rewards.

Answer 4

Land=Rent
Labour=Wages
Capital=Interest
Entrepreneurship=Profits

Question 5

Explain the factors of production in relation to the theory.

Answer 5

Land: The income earned by owners of land or natural resources. Rent is the payment made to the owners of land or natural resources.
Labour: The portion of income that goes to individuals who provide labour.
Capital: Interest is the income earned by owners of capital through investments in machines, factories and financial assets.
Entrepreneurship: Profits are the portion of income that goes to business owners who organize or manage production.