Transfer payments refers to money distributed by the government to individuals or groups. Transactions of this nature are all around us, even if most people are not familiar with the term—think Social Security and unemployment benefits.
Transfer payments themselves aren’t included in GDP, since GDP measures economic activity through the production of goods and services. However, since transfer payments affect consumer spending (since many programs essentially give people money, this increasing their spending ability), such payments (think stimulus checks) can increase economic activity.
Transfer payment spending has risen significantly since the 1960’s in the U.S., and apart from stimulus-check derived spikes, have remained at approximately the same level since ~2013 (as per FRED).
Characteristics of Transfer Payments
- Non-Exchange Transactions: transfer payments are given to individuals or groups without a direct exchange. Hence, these payments differ from purchasing a good or service.
- Government-Initiated: transfer payments are sent from the government to individuals or groups.
- Purpose: many transfer payments (see below) provide social financial assistance.
Common Transfer Payments
Social Security Benefits.
Unemployment Benefits.
Public Insurance Programs.
Medicare.
Disability Programs.
Food Stamps.
Temporary Assistance to Needy Families (TANF).
Impact
Given their role in providing social assistance, transfer payments usually aim to stabilize the economy (stimulus checks, unemployment benefits, etc.), redistribute income (tax money → Social Security, etc.), and generally support individuals where it’s most needed.
To learn more about economics, consider reading about the Economic Fluctuations Model, the Gains from Expanded Trade Model, and the Spending Allocation Model. Else, consider the other articles in my Economic List below.
