1.

10 CONCEPT OF TRANSFER PAYMENT

1.10.1 Meaning
While measuring national income of a it must be kept in mind that not every income 1s
country, a
factor income. For example, payment of a gift to anybody, even to employees, is not a factor payment
because it is not a remuneration for the work. Payment of tax to government is not a payment
related to production because there is no contract between the tax payer and the goverrnment for

providing goods and services in return for tax payment. The amount of tax levied on individuals
and institutions must be paid to the government. It has nothing to do with whether the government
provides services in return or not. Donations, charity by government to the people, scholarships
to students, payment of pocket money to children, donations from foreign governments, winnings
from prizes, etc., are all examples of transfer payments. Such payments are called transfer
lotteries,
For
payments. payers, these are transfer expenditures (as distinguished from final expenditures).
Definition
How to identify transfer payments? In other words, how to define transfer
define
payments? We can
a transfer as follows:
 A
transfer payment is a
service in return.
payment of income without receiving from the recipient any good, or

In brief, any payment made withoutgetting any good or service in return is a transfer payment. It
is a payment without any quid pro quo. For example, consider a gift. The payer makes payment
in the form of money, or goods, or service but does not receive anything in return. It is a transfer
payment. Let us now take an example of what is not a transfer payment. The production unit
makes payment of wages to the worker and in return gets the services of that worker. It is not a
transfer payment but a factor payment. All transfer payments are kept out of national income.
This point must be kept in mind while studying the estimation of national income.

1.10.2 Current vs. Capital Transfers

Transfers are of two types : (a) current transfers, and (b) capital transfers.
(a) Current transfers : A transfer made out of current income (disposable income) of the payer and
added to the current income (disposable 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 the country are: tax, donations, scholarship, unemployment
allowances, old age pensions, gifts, winning of lottery prizes etc. from one resident to another.

Examples of current transfers between different countries are help in the form of donations etc.
by the residents of one country to another country in time of natural calamities; transfer of money
on household to household basis by relatives residing abroad etc.
(b) 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 position of both the parties. Main examples of such transfers within the country are : capital
grants, lump sum payments to households affected by natural calamities, accidents, etc. payment
of taxes on capital and wealth etc. Such transfers also take place between countries. Main examples
are international grants, war damages etc.
The essential point to be noted is that no transfer whether current or capital is considered while
making estimates of national income. At the same time only current transfers are considered
while estimating the disposable income.
 1.8 ECONOMIC TERRITORY
1J The United Nations System of National Accounts, briefly called SNA, defines economic (or domestic)
that administered by government within which persons, goods
territory as geographic territory a

and capital circulate freely.

country is defined to include and exclude the
Accordingly, the scope of economic territory of a

following
(a) Political frontiers including territorial waters and airspace.
(6) Embassies, consulates, military bases, etc. located abroad (but excluding the foreign ones
located within its own political frontiers).
more countries.
(c) Ships, aircrafts, etc. operated by the residents between two or
residents in the international waters
(d) Fishing vessels, oil and natural gas rigs etc. operated by
or other areas over which country enjoys exclusive rights or jurisdiction.
Economic territory of a country is different from its political frontiers, i.e. geographic territory. As
we have seen, it excludes some areas of political frontier of the country
in question and includes
certain areas outside its own political frontier. The scope of economic territory is
based on economic

criterion.
1.9 RESIDENT
Definition: National income measures economic activities carried out by the residents
the value of
understand the meaning of the term 'resident' of a
of country. It is, therefore, first necessary to
a

country. A resident is defined as follows

A resident, whether a person or an institution, is one whose centre of economic interest lies in
the economic territory of the country in which he lives or is located.

By centre of economic interest it is meant that (a) the resident lives or is located within the economic
territory and (b) the resident carries out the basic economic activities from that location.
Resident vs. Citizen : There is a difference between the terms resident and citizen (or national).
A person becomes a national of a country because he was born in the country or on the basis
of some other legal criterion. A person is treated resident of a country on the basis of economic
criterion stated above. It is not necessary that a resident must also be the national of that
country. Even foreigners can be the residents if they pass the above stated economic test. For
example, a large number of Indian nationals have settled in U.S.A., England, Australia, etc. as
residents (and not as nationals) of these countries. For India, they are Non-Resident Indians
(NRI) but continue to remain Indian nationals.
Examples of non-residents The following categories of institutions and persons are not treated
as residents of the country in which they are situated or living, It is because they do not fulfil the
criterion of 'centre of economic interest'.
(1) International organisations like the World Bank, World Health Organisation, L.M.E.,
LL.O. etc., are not treated residents of any country but of "international area". For the country
in which these are situated, are non-resident
organisations.
(2) Employees of international organisations are considered residents of the countries to which
they belong and not of the 'international area'.
(3) Workers from across the border who cross borders regularly to work in the given country
are treated as residents of the country where they live and not the resident of the country
where they work.
(4) Foreign visitors or travellers visiting the given country for studies, medical treatment,
recreation, to take part in sports, cultural events, etc. are non-residents for the country they
are visiting.
(5)
(5) Foreign staff of embassies and menmbers of foreign armed forces located in the given
country are treated as non-residents.
(6) The crews of foreign ships, aircrafts etc. are treated as non-residents.

Examples
Q.1. Are the following normal residents of Indian economy?
()Indians employed in the World Health Organisation located in India.

(i) An American tourist staying in India. (C.B.S.E.)

Answer
i) Indians employed in WHO located in India are residents of India because their economic
interest lies in India and they live in India.
American tourist staying in India is not the resident of India. He is the resident of America
(i)
because his economic interest lies in America and he lives in America.
Q.2. Are the following normal residents of Indian economy?
wages and into
) Indian workers employed in the power projects of Nepal on daily crossingg
Indian territory every week.
(ii) Indians working in the U.S.A. embassy in India. (C.B.S.E.)
Answer
Indian workers in Nepal are normal residents of India because they live in India and their
centre of economic interest lies in India.
(i) Indians working in the USA embassy in India are normal residents of India because they
live in India and their economic interest lies in India.
2.7 NET INDIRECT TAXES (NIT)
indirect taxes and subsidies.
Net indirect taxes referto the difference between
Taxes Subsidies
Net Indirect Taxes =Indirect
-

Let us discuss the two components of NIT:

(i) Indirect Taxes Figures in T/litre

Indirect taxes refer to those taxes Petrol Diesel
which are imposed by the govern- Base Price 57.16 57.94
ment on production and sale of Freight 0.20 0.22
goods and services. For example, Excise Duty 19.90 15.80
Goods and Services Tax (GST), Dealer Commission 3.75 2.55
Basic Customs Duty, Central Ex- VAT 15.71 13.11
cise and VAT on Petroleum Prod- Retail Price 96.72 89.62
ucts, Excise on Liquor, Electricity Price/litre in Delhi as on 29th November, 2022

Duties, Stamp Duty, Securities Central Excise and State VAT (Indirect Taxes) account
Transaction Tax, Entry Taxes and for major share of the retail price of Auto Fuel
Toll, etc.
Indirect tax increases the price of the product in the market. For example, if cost of producing
one set of speakers is 500 and Government levies GST of 10%, then price of speakerS will
increase to 550 due to indirect taxes.

(ii) Subsidies
Subsidies are the financial assistance' provided by the government to producers to fulfil its
social welfare objectives. In India, LPG cylinder is sold at subsidized rates.
They are often granted to promote exports or to encourage firms for setting up the industries
in the backward areas.
Subsidies are opposite to indirect taxes as they reduce the market price of the commodity.
In the example of speakers, if the Government grants a subsidy of T 10, then price of speakers
will fall to 540 due to subsidies.
.Subsidies may also be referred as 'Economic Assistance' or 'Financial Assistance'.
 .Subsidy is a "Transfer Payment' as it is the financial assistance
provided by the
to producers to fulfil its social welfare objectives. Government does not get anything im government
return in consideration for the same. Subsidy does not contribute to any value addition as
it does not contribute to current flow of goods and services.
Factor Cost Vs Market Price

(a) Factor Cost (FC): It refers to amount

paid to factors of Market Price
production for their contribution in the production process.
In the given example,? 500 is the 'Factor Cost'.
(b) Market Price (MP): It refers to the price at which product is
actually sold in the market. In the given example, F 540 is the
Market Price. It includes the indirect taxes and excludes the
Factor Cost
subsidies.
Market Price Factor Cost+(Indirect
Taxes-Subsidies)
=

Market Price Factor Cost + Net Indirect Taxes

=

Calculate Net Indirect Taxes (NIT) in the following cases:

Case 1: () Indirect Taxes = 0; (ii) Subsidies =7 100
Ans. NIT=0-7 100 =-7 100
Case 2: (i) Indirect Taxes = T 250; (ii) Subsidies = 0
Ans. NIT= 250 -0 =R 250

Case 3: (i) Indirect Taxes =R 200; (i) Subsidies = 7 120

Ans. NIT= 200- 120=7 80
The concept of NIT is very important to differentiate between Factor Cost and Market Price. 'Market
Price'includes net indirect taxes, whereas,'Factor cost'excludes it. The concepts of indirect taxes and
subsidies do not arise in a two-sector economy including households and firms. This concept is
relevant ina three-sector and four-sector economy.

2.8 NET FACTOR INCOME FROM ABROAD (NFIA)

It refers to the difference between factor income receivedfrom the rest of the world and factor
income paid to the rest of the world.
NFIA Factor income earned from abroad - Factor income paid abroad

Factorincome from abroad' is the income earned by the normal residents of a country from
the rest of the world (ROW) in the form of wages and salaries, rent, interest, dividend and
retained earnings.
'Factor income to abroad' is the factor income paid to the normal residents of other countries
(i.e. non-residents) for their factor services within the economic territory.

Significance of NFIA
NFIA is significant to differentiate between 'Domestic Income' and National Income'. In
Practical estimates, domestic income is estimated first and then, National Income is derived
from Domestic Income in the following manner:
 National Income
= Domestic Income

(due to contribution of National

+Factor income from abroad
economic
normal residents to production outside the
territory)
-Factor income to abroad (due to contribution of non-

residents to production inside the economic territory)

Domestic
The difference of Factor income from abroad and Factor
income to abroad is termed as "Net factor incomefrom abroad
or popularly abbreviated as NFIA.

So, National Income =Domestic Income + NFIA

NFIA can be Positive, Negative or Zero

NFIA is Positive when income earned from abroad is more than income paid to abroad.
NFLA is Negative when income earned from abroad is less than income paid to abroad.
NFIA is Zero when income earned from abroad is equal to income paid to abroad.

Components of NFIAA
There are three main components of NFIA:
1. Net Compensation to Employees: It refers to difference between income from work
received by resident workers living or employed abroad for less than one year and similar
payments made to non-resident workers staying or employed within the domestic territory
of the country for less than one year.
2. Net Income from property and entrepreneurship: It refers to difference between income
from property and entrepreneurship (in the form of rent, interest and dividend) received
by residents of the country and similar payments made to the non-residents.
3. Net Retained Earnings: It refers to difference between retained
earnings of resident
companies located abroad and retained earnings of non-resident companies located within
the domestic territory of the country.

Retained Earnings refer to that part of profits which is kept as reserve after
paying the corporate tax
and dividends.

Thus, it may be concluded that:

NET FACTOR INCOME FROM ABROAD (NFIA)

Net Compensation of
Net Income from
Employees (Net COE) + Property
and Entrepreneurship Net Retained Earnings
 It must be noted that NFIA is such economy does not deal with the
zero in a closed economy as res
of the world sector.

Before we proceed further

in different
Students must be very careful while dealing with NFIA. Quite often, NFIA is given
forms. Let us discuss treatment of NFLA in the following cases:
in the following
Calculate NFIA cases:

R 800
Case 1: (i) Factor income from abroad =7 500; (i) Factor income to abroad =

Ans. NFIA =7500 -R 300 7 200

Factor income to abroad R 620

Case 2: (1) Factor income from abroad =7 250; (ii) =

Ans. NFIA = { 250 - 620 =

(-)F 370

Case 3: Factor income to abroad =7 150

Ans. NFIA (-)F 150
=

Case 4: Factor income to abroad =-7 150

Ans. NFIA 7 150
=