Difference between Factor Payment and Transfer Payment

This article will help you to learn about the difference between factor payment and transfer payment during the production returned.

Difference between Factor Payment and Transfer Payment during the Production Returned

Difference – Factor Payment:

Payment made to a factor of production in return for rendering productive (or factor) service is called factor payment (or factor income).

This is reward or compensation to factors of production for productive services rendered by them in the production process and for them these are factor income.

Examples are rent, wages, interest and profit. Income of land is rent, of labour wages, of capital interest and of enterprise is profit. This also means that in order to earn income, one has to contribute in the production process.

Remember, without production, we cannot conceive of factor income.

All factor payments (or factor incomes) are included in the national income.

Factor incomes earned by factors of production and factor payments made by an enterprise to factors for rendering productive services are, in fact, the same. The former is viewed from the side of factors of production and the latter from the side of an enterprise.

Difference – Transfer Payment:

Payment received without any good or service provided in return is called transfer payment (or transfer income).

Transfer income is a receipt concept as compared to factor income which is an earning concept. We have already discussed in the preceding pages that income arises from production of goods and services.

But there are certain types of payments which are received without making any corresponding contribution to the flow of goods and services, i.e., they are not earned but received only. Such payments for which no productive services are rendered are known as transfer payments.

Thus, all unilateral (or one directional) payments are transfer payments. For recipient, a transfer payment is an unearned income. Examples of transfer payments are old- age pension, scholarships to students, unemployment allowance to unemployed people, flood relief pocket money, etc. These payments are received without making contribution to production.

It may be noted that such payments may be personal incomes of the recipients since they get purchasing power equal to the value of the amount received but these cannot be termed as factor incomes or factor payments since they have not been earned. They are, therefore, called transfer payments or transfer incomes for they are merely transferred by the government or other agencies without getting in return any productive services from the recipients. Hence, they are not included in the national income of a country.