Difference Between Factor Income and Transfer Income

National income tends to be the summation of all the factor incomes that a country’s residents earn during the time of the accounting year. Here the incomes or payments that result in the flow of goods, as well as services, are considered. Two kinds of income exist, factor income as well as transfer income.

Factor Income vs Transfer Income

The difference between factor income and transfer income is that factor income is the means of production like rent, wages, interest as well as profit that accrues to land, labor, and capital along with the entrepreneur, respectively. On the other hand transfer income is the income that is not gotten by the individual in the form of rewards for services given.

The income gotten by factors of production particularly for rendering factor services with the production procedure is referred to as Factor Income.

Factors of production will be the primary inputs, like land, labor, capital, plus the entrepreneur needed to produce goods and services. When figuring out the National Income of an economy, the factor income gotten by normal residents is added.

The income gotten by a person without rendering a productive service in return is referred to as Transfer Income. This is a unilateral concept and will not be added to National Income. This is because it does not include the production of goods plus service.

This includes stuff like old age pensions, gifts, scholarships, etc. The income may be received from abroad or inside the domestic territory of some countries.

Comparison Table

Parameters of ComparisonFactor IncomeTransfer Income
DefinitionThis refers to the income that one can get by selling inputs or the means of productionThis refers to the income that a recipient gets without giving any goods, services, and assets to the payer
Payment TypeBilateralUnilateral
EncompassesRent, salary plus wages, interest, and profitScholarship, pension, allowance, gift, grant, and more
National Income FeaturesAdded when estimating National IncomeNot added when estimating National Income
ConceptIt is an earning conceptIt is a receipt concept

What is Factor Income?

Factor Income involves the payments that are made by production units of firms. This is to owners of the factors of production, for employing factor services like land, labor capital, etc.

The factor income will be generated at the time that there is any productive activity. It will be paid to the factors specifically for the services given in the formation of current output. This is why it will be an earned income moreover kept in mind when calculating national income.

People give their factor services to production units like firms. These services are then used for producing goods and services. Therefore, the higher the level that production will be, the more the level of income will be, and vice versa.

This is why, what is distributed like factor income, is simply the value of production. All factors of income will be taken into account when calculating national income because of the flow of goods plus services.

What is Transfer Income?

Transfer income means the income gotten without any flow of goods plus services. It tends to be a unilateral type of payment. Therefore no sacrifice occurs on the part of the recipient.

An individual can get like financial help, some gifts in cash, a donation to a trust and NGO, unemployment allowance, a pension to the elderly, pocket money for kids, scholarships to students, and more.

Therefore the individual getting a transfer payment will not be involved in the procedure of production. They are not earned like consideration or reward for providing services to a production unit. Therefore they are not added to the national income.

You should know that whilst wages to labor are added to national income, pensions given to retired workers will be excluded from the national income.

For instance, the taxes given to the government of some countries will be the transfer incomes, because they get taxes without providing any production service for them.

Subsidies provided to citizens by the government will be transfer payments because no productive service is given in return.

Transfer payments may be current transfers or maybe capital transfers. You need to keep in mind that no transfer is added whilst figuring out the national income of some countries. 

Main Differences Between Factor Income and Transfer Income

  1. When it comes to the production procedure, the factor income means the income that is accrued to factors of production. This will be for rendering productive services. On the other hand, transfer income is income that is received, but does not include the provision of goods, services, and assets in return.
  2. Factor income will be an earned income while transfer income will be an unearned income.
  3. Factor income is a bi-lateral payment whilst transfer income will be a unidirectional payment.
  4. Transfer income is not included when calculating the national income but factor incomes made by normal residents are added to the national income of some countries.
  5. Factor income includes wages, rents, interest, etc. while transfer income includes scholarships, old age pensions, etc.

References

  1. https://www.sciencedirect.com/science/article/pii/0047272784900598
  2. https://www.sciencedirect.com/science/article/pii/S109420250800015X
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