So 360/ps3 video games takes a few months to a few years to make I assume. If so where does the money to pay employees and costs of everything needed to make the game come from during those few months/few years?
Depends on the game and the people making it. There are common sources for nearly any product being created, games aren't that different, but the below are tailored slightly more towards games:
- Publisher: A company that partners with a development studio to create a game. This is very much like an investor below, but the publisher will typically have considerably more control and influence over the final product.
- Investors: People or companies with money. They invest the money to make the game, they share in the profits.
- Capital from previous games: The game companies themselves fund the games with money they made from previous games.
- Personal funds: Indie devs often work for no money, have jobs on the side or burn through their savings while working on their game.
- Crowd sourcing - Kickstarter or similar sites allowing the crowd funding of games.
- Grants: Via the government of their country or various organizations promoting arts.
- Loans: Companies or individuals can take out a loan to pay for the development costs of a game (this is similar to investors, but with banks and likely more liability).