Why does the government exclude transfer payments (like ayuda or pensions) from the calculation of GDP?
Answer (2)
The government excludes transfer payments (like ayuda or pensions) from GDP because they are not payments for goods or services produced. GDP measures the total value of final goods and services produced within a country. Transfer payments are simply redistributions of income—no new production occurs, so they don't contribute to GDP.
Transfer payments such as ayuda (cash assistance), pensions, and subsidies are excluded from GDP because they do not represent the production of new goods or services. GDP measures the value of all final goods and services produced within a country during a specific period. Transfer payments are simply money given from one party (usually the government) to another without anything being produced in return.For example, if the government gives ₱8,000 in emergency cash to a low-income family during a pandemic, that is a transfer of funds, not a payment for any product or service. While the family may spend it later—say, on groceries or medicine—that actual spending will be counted under Personal Consumption Expenditure. But the act of transferring the money itself is not counted as part of GDP.This distinction is important because if we included transfer payments in GDP, we would be overestimating the actual economic output. It would be like counting the same money twice—once when it’s transferred and again when it’s spent.In the Philippine setting, the Pantawid Pamilyang Pilipino Program (4Ps) provides cash assistance to millions of poor households. While the intention is to support health and education outcomes, the transfer itself is not considered GDP. However, when families use the money to buy food, uniforms, or pay for transportation, that spending enters the GDP under consumption.So while transfer payments are essential for reducing poverty and supporting families, they are not considered part of GDP because they do not reflect new economic activity.
