FACTOR INCOME and TRANSFER INCOME
Here we will discuss two simple economic concepts which would be useful in understanding advanced concepts like Domestic Income, National Income, GDP etc.
Factor Income - in the simplest terms, it refers to the income generated through services. It is like a payment received against services like salary , rent.
These incomes broadly come from 4 categories which we also call the “4 Factors of Production”. They are Land, Labor, Capital, Enterprise (or entrepreneurship).
Land – Land can generate income by giving us rent. For example the money that you would receive on leasing out a piece of land is your income.
Labor – Labor generates income by giving services. This income is also called wages. For example the salary received by a software engineer in an IT firm is his income
Capital – A person having capital can earn interest. For example the interest from your fixed deposit accounts can act as an income
Enterprise (or entrepreneurship) – An entrepreneur can earn through profits. The profit is his or her income.
Transfer Income – In the simplest terms, transfer income is the income received without giving out any service. This is a one sided payment received i.e. there is no exchange of productive service for the income received.
Example would be the subsidies given by government to reduce production cost, pensions by government, social benefits by the government in some countries to people who are ill or jobless etc. In these examples there is only one sided payment without receiving any service in return.
What about taxes received by the government? Is it a factor income or transfer income?