What are transfer payments?
These are the payments that the government makes available to the public through the social security or welfare system. These are one-way payments made to the individuals. That means the government does not require the receiving party to give produce any good or service.
Pensions, unemployment benefit, student grants, child benefit, etc.
If the government provides assistance or subsidy to encourage production or to encourage provision of a service, it is not considered as a transfer payment. Therefore transfer payments are not included in the gross national product.
The purpose of transfer payments
Transfer payments are used by the government as a tool to redistribute income and wealth.
Even though no production takes place through the transaction of the transfer, it is nevertheless a monetary injection to the economy, therefore it can increase the money supply and as a result, demand.