Why Transfer Payments Are Excluded From Gross Domestic Product?


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Tariq Habib Profile
Tariq Habib answered
Does this mean that every dollar of government expenditure is included in gross domestic product? Definitely not. Gross domestic product includes only government purchases of goods and services, it excludes spending on transfer payments.

Government transfer payments are government payments to individuals that are not made in exchange for goods or services supplied. Examples of government transfers include unemployment, insurance, veteran's benefits, and old age or disability payments. These payments meet some social purpose. But since they are not payments made to purchase a current good or service, they are omitted from gross domestic product.

Thus if your receive a wage from the government because you are a teacher, your wage is a actor payment and would be included in gross domestic product. If you receive a welfare payment because you are poor, that payment is not in return for a service but is a transfer payment and would be excluded from gross domestic product.

Finally do not confuse the way the national income accounts measure government spending on goods and services with the official government budget. When the Treasury measures its expenditures, they include expenditures on goods and services plus transfers.

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