Chapter-3: National Income & Related Aggregates
National Income is the sum total of factor incomes earned by normal residents of a country (within the domestic territory and from rest of the word) during the period of an accounting year.
FACTOR INCOME VS TRANSFER INCOME
Factor Income: These are the incomes received by the owners of factors of production for rendering their factor services to the producers. In other words, these are earned income, e.g. income from land is rent, salaries of Indians working in foreign embassy which is located in India.
Transfer Income: Income received by households, production units and non-profit making institutions from government and other sources without rendering any service are known as transfer income. In other words, these are received income, e.g. pension received by an old age person, unemployment allowances.
THE DIFFERENCE BETWEEN FACTOR INCOME (OR PAYMENT) AND TRANSFER INCOME
|Basic||Factor income (or payment)||Transfer Income (or Payment)|
|Meaning||It is received by factors of production (land, labour, capital and enterprise) in return for rending productive service.||It is receives without providing any good or service in return.|
|Examples||It includes rent wages, interest and profit.||Gifts, subsidies, donations, scholarships etc. are examples of transfer income.|
|Nature||It is an earned in-come and hence an earning concept.||It is an unearned income and hence, only a receipt concept.|
|Treatment||It is included in national income.||It is not included in national income.|
CURRENT TRANSFERS AND CAPITAL TRANSFERS
A transfer is a transaction in which the payers provide a good, service or an asset without receiving from the recipient any good, service or asset in return. Transfers are of two types:
- Current transfers: A transfer made out of current income of the payer and added to the current income of the recipient is called a current transfer. These transfers can be within a country, or between two countries. Examples of current transfers within a country: Tax, donations, scholarship, unemployment allowances, old age pension, gifts, etc. from one resident to another.
Examples of current transfer between different countries: Help in the form of donations, etc, by the residents of one country to the residents of other country in time of natural calamities; transfer of money on household to household basis by relatives residing abroad etc.
- Capital transfers: A transfer made out of wealth or capital of the payer and gets added to the wealth or capital of the recipient is called a capital transfer. Such transfers affect the wealth or capital of both the parties. Capital grants, lump sum payments to households affected by natural calamities, accidents, are examples of capital transfers within the country, such transfers also take place between countries. Main examples are: international grants, compensation for war damages, etc. The essential point to be noted here is that no transfer whether current or capital is taken into account while estimating national income.
It is the sum total of factor incomes generated within the domestic territory , no matter who generates this income – residents or non residents .