Functional Distribution of Income:

Functional distribution of  income refers to  the returns to  labour, land  and capital as determined  by  factor prices, utilization  levels,  and  the  consequent share  of  the .national  income that accrue to the owners of each  factor. The theory of functional distribution is also known as the theory of  factor prices as it deals with  factor prices like rent, wages, interest and profits. In  the Eighteenth century, Ricardo analysed the income  distribution  among  social  classes based  on  the  analysis of  the  functional distribution  as  the  capitalists and landlords owned  the means  of  production  and received profit and rent  respectively for  using  their resources and  labour received wages as they had  only their labour power to sell. Later, Marx considered only profit and wages as two major components of functional distribution of income which would indicate the pattern of income distribution in society. Both  Ricardo and Marx argued  that the  process  of economic growth will  lead  to  inequality as the share of landowners  (Ricardo's argument)  and profits of capitalists  (Marx's argument) will go up with progress.

The functional distribution of incomealso considers the decomposition of incomes based on profits and interest, transfer payments, pension rights. The finer decomposition of income distribution provides  a  correct picture  of income distribution, therefore,  it  is  important to study the distribution of other assets like stocks, land, houses and other forms in which wealth is stocked. A long term study of the functional distribution or the decomposition of income would give an accurate assessment of the size distribution of income levels in a country. Size distribution of income is an indicator of the spread of income levels amongst households. A more equal distribution of income occurs when greater share of the incremental income goes to the lower income classes.

The implications of functional distribution of income on poverty refer to factor price distortions that enter in economic decision-making as a result of various factors. As economies progress and the levels of economic activities go up, there will be changes in the value of stocks and assets such as land or houses. This would lead to changes in incomes of various households with access to such assets. It could also deal with policy interventions for altering the functional distribution of the share of factors
engaged in the development process.