Transfer Payments
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Define:
a- Transfer payments, and
b- Explain why they are not included in the government purchases part of the GDP accounts
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Solution Summary
Transfer Payments are defined. The expert explains why transfer payments are not included in the government purchases part of the GDP accounts are determined.
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Solution:
(a) Transfer payments
In economics, a transfer payment is a income redistribution in the market system. These payments are considered to be non exhaustive because they do not directly absorb resources or create output. Examples of some transfer payments include welfare (financial aid), social security, and government subsidies for certain businesses (firms).
(b) Explain why they are not included in the government purchases part of the GDP accounts
The government spends money on public goods because there is a market failure when public goods are left to private markets. Thus the motivation for this intervention is social efficiency. In contrast, government spending on transfer payments is primarily concerned with equity and income redistribution. By spending money on the unemployed, the old, and the poor, the government seeks to ensure that the distribution of income and welfare that a totally free market economy would otherwise have produced is at least truncated; there is a minimum standard of living below which no citizen should fall. The specification of this standard is a pure value judgment.
Where does the money come from to pay the poor and the disadvantaged? Primarily from those who can most afford to pay? The tax and ...
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