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 and services are considered. Two kinds of income exist, factor income as well as transfer income.
Key Takeaways
- Factor income is the income earned from the factors of production, such as wages, rent, and interest. In contrast, transfer income is received without participating in the production, like social security payments and grants.
- Factor income is a productive flow, whereas transfer income is a redistributive flow.
- Factor income constitutes a significant portion of a nation’s GDP, while transfer income is excluded from GDP calculations.
Factor Income vs Transfer Income
Factor income is income that is obtained by a person by contributing to the production of goods and services and other income-generating processes. A person obtains transfer income without any contribution to the production process. This income involves gifts, scholarships, etc.
The income obtained 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, labour, 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 Comparison | Factor Income | Transfer Income |
|---|---|---|
| Definition | This refers to the income that one can get by selling inputs or the means of production | This refers to the income that a recipient gets without giving any goods, services, and assets to the payer |
| Payment Type | Bilateral | Unilateral |
| Encompasses | Rent, salary plus wages, interest, and profit | Scholarship, pension, allowance, gift, grant, and more |
| National Income Features | Added when estimating National Income | Not added when estimating National Income |
| Concept | It is an earning concept | It 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, labour 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 production level will be, the more the income level will be, and vice versa.
This is why, what is distributed, like factor income, is simply the value of production. All income factors will be considered when calculating national income because of the flow of goods plus services.
What is Transfer Income?
Transfer income means the income received 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 labour 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
- When it comes to the production procedure, the factor income means the income accrued to production factors. 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.
- Factor income will be an earned income, while transfer income will be an unearned income.
- Factor income is a bi-lateral payment whilst transfer income will be a unidirectional payment.
- 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.
- Factor income includes wages, rents, interest, etc., while transfer income includes scholarships, old age pensions, etc.
- https://www.sciencedirect.com/science/article/pii/0047272784900598
- https://www.sciencedirect.com/science/article/pii/S109420250800015X
Last Updated : 28 July, 2023
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
