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Suppliers of factors of production are rewarded or compensated, which varies depending on what factors they supply. If we add up, we know the compensation as a factor income. If it is calculated for all economic actors in an economy, it is national income.
Economists say the rewards for factors of production are:
- Rent
- Wages
- Interest
- Profit
Rent
Rent is a reward for land. Landlords can lease their land to producers throughout the economy.
In the perspective of economics, land does not only include agricultural, plantation, or industrial areas. But, it also includes the natural resources contained in it, such as various metallic minerals, petroleum, and coal. They can be renewable resources, abundantly available in nature, and non-renewable resources, which can be exhausted if we over-exploit them.
Wages
Compensation to workers takes many forms. It can be wages, salaries, and benefits such as insurance and pensions. Wages usually refer to compensation to manual workers, for which they are paid hourly. Meanwhile, salary refers to compensation in a fixed amount, usually paid per month. If the wages received by workers depend on their total hours worked, it is not on salary. But, in economics, we specifically refer to them all as wages, i.e., compensation for workers’ mental and physical effort used in the production process.
Interest
Interest is compensation for capital. Capital represents a man-made tool to help process inputs into outputs. They include machinery, buildings, equipment, and vehicles. Sometimes, we also refer to them as capital goods.
Economists exclude financial capital such as cash, bonds, and stocks from the capital category. This is because we cannot use them directly to produce goods and services, but rather, we use them indirectly, namely as payment intermediaries to buy capital goods.
Profit
Profit is the reward for entrepreneurship. Entrepreneurs earn it for their willingness to take risks to commercialize a business idea, start and run a business. Profit is the revenue remaining after all production costs have been paid, including payments to suppliers of the other three resources.
