Differentiate between size and functional distributions of income
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Size distribution of income, sometimes referred to as Personal distribution of income describes the proportion of income obtained by an individual household regardless of its source, that is to say, individual household income figures are gathered and organized in ascending order and the relationship studied at various strata.
According to Friedman (1953), personal distribution of income has generally been considered to mostly be unaffected by the choices of individuals through the market, apart from instances where they have an impact on the per unit price of factors of production.
Functional distribution or ‘factor share distribution’ explains the share of total national income received by each factor of production. In other words, it relates to the distribution of rewards for the services of the factors of production.
Functional distribution is more suitable due to the fact that individual departments through the entire production process from raw material to final product will accrue their individual profits, corresponding to their costs, unlike size distribution where difficulties and losses may be met.
This essay will provide a more comprehensive look into the two measures of income distribution, extensively explain what they mean while pointing out what distinguishes one from another and finally identify the most suitable of the two measures and why.
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Question
Differentiate between size and functional distributions of income. Which of the two concepts do you consider more suitable? Justify your answer
Key Learning Outcomes
By the end of this assignment, students should be able to:
- Understand and discuss the difference between size and functional measures of income distribution
- Understand factors that affect the distribution of wealth and income
INTRODUCTION
For the purpose of analysis and quantifying, income distribution is ordinarily classified according to two primary measures by Economists and these are size distribution, also commonly known as the personal distribution of income, and functional/factor share distribution of income according to Todaro and Smith (2012).
According to Bertola et al (2005), the primary matter of concern to Classical economists was the way in which the output of an economy is distributed amongst the numerous societal classes. Whereas classical economists were keenly engrossed by functional income distribution amongst factors of production like profits, wages, and rent on land, the key income distribution interest of contemporary civilizations was size or personal income distribution. Despite its overriding significance in the classical economics of the 19th Century, the interest in income distribution has slowly waned in the current decades (Bertola et al, 2005).
Todaro and Smith, (2012) define Size or Personal distribution of income as the distribution of income based on the size class of individuals for instance, the proportion of total income being amassed by the poorest particular percentage of the population or the wealthiest particular percentage without any sort of consideration whatsoever of the income source. On the other hand, Functional/factor share distribution of income looks at income distribution to factors of production without any kind of consideration of ownership of the aforementioned factors (Todaro and Smith, 2012).
In this essay, therefore, we shall dig deeper into the size and functional distribution of income concepts of income distribution, their distinguishing factors, and explain why one takes precedence over the other.
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