Income in simple words refers to receiving money from others but that income can be due to productive work done by an individual or without doing any productive work and that is where factor income and transfer income comes into play. Factor income and transfer income are the terms used in the context of national income accounting, while as far as normal people are concerned income is income whether it is factor income or transfer income but as far as national income accounting is concerned the difference between the two assumes importance and that is the reason why one should know the difference between transfer income and factor income –
Factor Income and Transfer Income Differences
Meaning
Factor income refers to that income which is received by an individual for doing service or providing good to another party while transfer income refers to that income which is received by an individual without doing any service or providing any good to other parties.
Example
Wages or salary earned by workers, rent earned by the landlord, profit earned by companies, interest earned on deposits etc…..are some of the examples of factor income while gifts received by individuals, subsidy received by people from government, donations, etc…, are some of the examples of transfer income. In simple words suppose at your home if your parents ask to clean the house for 1 day and they give you $50 after seeing the house cleaner than it is similar to factor payment whereas if on a weekend your parents give you $50 for going with your friends than it is a case of transfer payment.
Reason for Income
Factor income happens because the factor of production like land, labor, capital work but as far as transfer income is concerned it does not happen due to any rather it happens because of individuals being in a special position. Hence for example farmers or lower income group receive subsidies due to them being poor or needy students receive scholarships because they are meritorious and so on.
Type of Payment
Factor income is a bilateral payment in the sense that when one party does something for other parties than only payment is made by one party to other party while transfer income is a unilateral payment in the sense that it is a one side payment and one party pays to other parties without other party doing anything for earning that payment.
National Income Inclusion
Factor income is included while calculating the national income of the country but as far as transfer income is concerned it is not included while calculating the national income of the country.
As one can see from the above that there are many differences between factor income and transfer income and that is the reason why accounting, as well as economics students, should know the difference as considering both incomes as same can be a big mistake.