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What is the difference between Factor Income and Transfer Income?

Factor Income and Transfer Income

What is the meaning of Factor Income?

Factor Income refers to incomes that accrue as rewards for the services provided by land, labor, capital, and entrepreneur. These factor incomes are usually distributed among three main factors of production i.e. land or natural resources, labor, and capital.

For example, wages paid to a laborer after working 8 hours for a day, interest on money invested in the bank, rent on land which is used for cultivation or manufacturing, etc.

What is the definition of Transfer Income?

Transfer Income refers to a payment received by a person without providing any service in return. There is no exchange of goods and services during transfer income. An example of a transfer income is the payment received by a person as unemployment compensation, retirement benefits, or social security. These incomes are not added while calculating National Income.

Factor Income vs Transfer Income: What are the differences?

The main difference between factor income and transfer income is that factor incomes are received as payment for services rendered whereas transfer incomes are not linked with the provision of any service. These incomes can be distributed among land, labor, capital, and entrepreneur. On the other hand, transfers cannot be shared between factors of production i.e. they do not form part of national income.

Other main differences between Factor Income & Transfer Income are –

  1. Factor Income is included in National Income whereas Transfer Income is not added.
  2. Factor income includes only factor incomes which are received by the factors of production while transfer income includes all types of payments without any exchange of goods and services.
  3. The source of factor income is mainly land, labor, capital, and entrepreneur while transfer income is not contributed by any of the factors.
  4. Factor income is distributed among three factors of production while transfer income can be received by any factor.
  5. Factor income is added to the national product whereas transfer income is not included in National Product.
  6. Factor Income causes the transfer of resources between different sectors and regions of the economy whereas Transfer incomes do not cause any transfer of Resources.
  7. Factor income comes in the form of profits and interest while transfer income can come in the form of pensions and subsidies too.
  8. Factor incomes are distributed among different factors while transfers cannot be distributed among different factors and regions of the economy.
  9. Factor income and Transfer Income refer to economic and financial concepts respectively.

These are some of the main differences between Factor Income and Transfer Income!!

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