Generation of income refers to the generation of income of the factors in the production process. Every production involves flow of goods, production of output also leads to emergence of factor incomes that accrue to different factors of production if factor incomes that accrue to different factors of production in the form of rent, wage, interest and profit. Production, income generation and capital formation are interrelating.

Any economic activity results in the production of output and generation of income. At the factors engaged in the production of output are rewarded for their contribution to the national income. Thus income received by the factors of production as reward for their factor services in the process of production.

Generation of income or domestic factor income refers to the income generated within the domestic territory of a country. Domestic factor income is the sum total of all the incomes generated by all the firms operating in the economy. It is comprised of all incomes earned by the nationals and foreigners.

Components of Domestic factor income:

(1) Compensation of employees


(2) Operating surplus.

(3) Mixed Income of the self employed.

(1) Compensation of employees:-

Compensation of employees means the payment paid to the workers for their contribution in the process of production, Compensation of employees is in the form of wages and salaries paid in cash and in kind, employer’s contribution in social security scheme.


Therefore, compensation of employees = GDP at factor cost – Rent – Interest – Profit – Consumption of fined capita.

(2) Operating Surplus:

Operating surplus is the difference of net value added of factor cost and compensation of employees. It is comprised of rent, interest and profit. It also includes all such incomes earned from ownership and control of property. Thus operating surplus emerges from the self owned property and income from entrepreneurial function.

The operating surplus = Gross value of output – Intermediate consumption – depreciation – net indirect tax – wages.


(3) Mixed Income of the self employed:

Mixed income is the income of the self-employed persons. A self employed person has got ownership over all factors of production. Stated otherwise a self- employed person supplies all kinds of factors for the production of output. The income he receives is the aggregate of values of factors employed by him.


So it is difficult to assess the amount of rent, interest, profit etc. from the total income received by him. For this reason his total income is called as mixed income. Thus mixed income includes income arising out of work and property and entrepreneurial function. It accrues both to the household and business persons.