Factor Cost

The following are the subtopics of factor cost:

• Compensation of employees
• Net operating surplus
• Mixed income
• Taxes on production and imports less subsidies on production and imports
• Consumption of fixed capital
• Statistical discrepancy
  Factor cost is a measure of the income generated by the factors of production in an economy. It is calculated by subtracting indirect taxes from gross domestic product (GDP) at market prices. The resulting figure is known as GDP at factor cost.

There are four main components of factor cost:

• Compensation of employees: This is the income earned by employees in the form of wages, salaries, and other benefits.
• Net operating surplus: This is the income earned by businesses after deducting their costs of production.
• Mixed income: This is the income earned by self-employed workers and farmers.
• Taxes on production and imports less subsidies on production and imports: This is the difference between the taxes that businesses pay on their production and the subsidies that they receive from the government.

Consumption of fixed capital is not a component of factor cost. It is a measure of the depreciation of capital goods that occurs during the production process.

Statistical discrepancy is a residual term that is used to account for any errors or omissions in the calculation of factor cost.

Factor cost is an important measure of economic activity because it provides a more accurate picture of the income that is generated by the factors of production. It is also used to calculate other important economic indicators, such as national income and personal income.

Compensation of employees is the largest component of factor cost. In 2019, it accounted for 62.3% of GDP at factor cost in the United States. Net operating surplus accounted for 19.1%, mixed income accounted for 12.4%, taxes on production and imports less subsidies on production and imports accounted for 5.2%, and consumption of fixed capital accounted for 1.0%.

The distribution of factor income varies across countries. In some countries, such as the United States, compensation of employees accounts for the majority of factor income. In other countries, such as China, net operating surplus accounts for a larger share of factor income.

The distribution of factor income also varies across industries. In some industries, such as manufacturing, compensation of employees accounts for the majority of factor income. In other industries, such as finance, net operating surplus accounts for a larger share of factor income.

The distribution of factor income is important because it affects the distribution of wealth and income in society. In general, workers who earn wages and salaries tend to have lower incomes than business owners who earn profits. This is because wages and salaries are typically taxed at a higher rate than profits.

The distribution of factor income is also important because it affects the level of economic growth. In general, countries with a more equal distribution of factor income tend to have higher levels of economic growth. This is because a more equal distribution of income leads to a more stable economy and a more productive workforce.
Compensation of employees

• What is compensation of employees?
  Compensation of employees is the total remuneration, in cash or in kind, payable by employers to employees in return for their work done during the accounting period. It includes wages, salaries, and other forms of cash remuneration, as well as the value of social contributions paid by employers on behalf of their employees.
• What are the different types of compensation of employees?
  The different types of compensation of employees include wages, salaries, bonuses, commissions, tips, and fringe benefits.
• What are the main factors that affect compensation of employees?
  The main factors that affect compensation of employees include the level of economic activity, the demand for labor, the supply of labor, and the bargaining power of employers and employees.

Net operating surplus

• What is net operating surplus?
  Net operating surplus is the income that accrues to the owners of a business after all costs have been paid. It is calculated as the difference between the value of output and the costs of production, including the cost of labor, the cost of capital, and the cost of materials.
• What are the different types of net operating surplus?
  The different types of net operating surplus include gross operating surplus, net operating surplus before taxes, and net operating surplus after taxes.
• What are the main factors that affect net operating surplus?
  The main factors that affect net operating surplus include the level of economic activity, the prices of inputs and outputs, the efficiency of production, and the tax system.

Mixed income

• What is mixed income?
  Mixed income is the income that accrues to self-employed workers. It is calculated as the difference between the value of output and the costs of production, including the cost of labor, the cost of capital, and the cost of materials.
• What are the different types of mixed income?
  The different types of mixed income include gross mixed income, net mixed income before taxes, and net mixed income after taxes.
• What are the main factors that affect mixed income?
  The main factors that affect mixed income include the level of economic activity, the prices of inputs and outputs, the efficiency of production, and the tax system.

Taxes on production and imports less subsidies on production and imports

• What are taxes on production and imports?
  Taxes on production and imports are taxes that are levied on goods and services produced or imported into a country. They include value-added taxes, sales taxes, excise taxes, and import duties.
• What are subsidies on production and imports?
  Subsidies on production and imports are payments that are made by the government to producers or importers of goods and services. They are designed to reduce the costs of production or to make imports more competitive.
• What are the main factors that affect taxes on production and imports?
  The main factors that affect taxes on production and imports include the level of economic activity, the prices of goods and services, and the government’s fiscal policy.

Consumption of fixed capital

• What is consumption of fixed capital?
  Consumption of fixed capital is the estimated amount of capital that is used up in the production of goods and services during an accounting period. It is calculated as the difference between the value of the capital stock at the beginning and end of the period, adjusted for depreciation.
• What are the different types of consumption of fixed capital?
  The different types of consumption of fixed capital include gross fixed capital formation, net fixed capital formation, and depreciation.
• What are the main factors that affect consumption of fixed capital?
  The main factors that affect consumption of fixed capital include the level of economic activity, the age of the capital stock, and the rate of depreciation.

Statistical discrepancy

• What is statistical discrepancy?
  Statistical discrepancy is the difference between the total value of output and the total value of income in an economy. It is a measure of the errors and omissions in the national accounts.
• What are the main factors that affect statistical discrepancy?
  The main factors that affect statistical discrepancy include the quality of the data, the coverage of the data, and the methods used to compile the data.

• Which of the following is not a subtopic of factor cost?
  (A) Compensation of employees
  (B) Net operating surplus
  (C) Mixed income
  (D) Taxes on production and imports less subsidies on production and imports
  (E) Consumption of fixed capital

• Which of the following is the sum of compensation of employees and net operating surplus?
  (A) Mixed income
  (B) Taxes on production and imports less subsidies on production and imports
  (C) Consumption of fixed capital
  (D) Factor cost
  (E) GDP at market prices

• Which of the following is the difference between factor cost and GDP at market prices?
  (A) Taxes on production and imports less subsidies on production and imports
  (B) Consumption of fixed capital
  (C) Statistical discrepancy
  (D) Net national income at factor cost
  (E) Net national product at factor cost

• Which of the following is the sum of compensation of employees, net operating surplus, and mixed income?
  (A) Factor cost
  (B) GDP at market prices
  (C) Net national income at factor cost
  (D) Net national product at factor cost
  (E) Gross national income at market prices

• Which of the following is the sum of compensation of employees, net operating surplus, mixed income, taxes on production and imports less subsidies on production and imports, and consumption of fixed capital?
  (A) GDP at market prices
  (B) Net national income at factor cost
  (C) Net national product at factor cost
  (D) Gross national income at market prices
  (E) Gross domestic product at factor cost