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What is Factor Income and Transfer Income?

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  • Last Updated : 22 Aug, 2022
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Macroeconomics is a part of economics that focuses on how a general economy, the market, or different systems that operate on a large scale, behaves. Macroeconomics concentrates on phenomena like inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.

“Macroeconomics is that part of economics which studies the overall averages and aggregates of the system”. – KE Boulding

Factor Income

The income received by factors of production for rendering factor services in the production process is known as Factor Income. Here, factors of production are the primary inputs such as land, labour, capital, and entrepreneur required for the production of goods and services. For example, wages, rent, profit, and interest. While determining the National Income of an economy, factor income received by its normal residents is also included. 

Transfer Income

The income received by an individual without rendering any productive service in return is known as Transfer Income. Transfer Income is a unilateral concept and is not included in National Income, as it does not involve the production of goods and services. For example, Old age pension, pocket money, gifts, scholarship, etc. Transfer Income can be received either from abroad or within the domestic territory of a country. For example, Taxes paid to the government of a country are the transfer incomes, as they receive taxes without rendering any productive service in return. Similarly, subsidies provided to the citizens by the government are transfer payments, as they do not get any productive service in return.  

Transfer can be of two types: Capital Transfer and Current Transfer. 

Basis

Current Transfer

Capital Transfer

Meaning A transfer that is made out of income is known as a current transfer. A transfer that is made out of the wealth of the payer is known as a capital transfer. 
Nature Generally regular in nature. Generally irregular in nature. 
Meant for These are meant for consumption purposes. These are meant for capital formation.
Example Gifts, Old age pensions, Unemployment allowance, etc. War damages, Investment Grant, Capital Gains tax, etc. 

Factor Income Vs Transfer Income

Basis

Factor Income

Transfer Income

Meaning The income received by factors of production for rendering factor services in the production process. The income received by an individual without rendering any productive service in return.
Concept Factor Income is an earning concept. Transfer Income is a receipt concept.
Nature Factor Income is included in both Domestic Income and National Income of an economy.  Transfer Income is neither included in Domestic Income nor in the National Income of an economy. 
Recipient Factor Income is received by the factors of production, i.e., labour, land, capital, and enterprise. Transfer Income is received by the households and the government.
Example Wages, Rent, Interest, and Profit. Scholarship, Unemployment Allowance, Gifts, Old Age Pensions. 
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