In
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
, the transfer payments multiplier (or transfer payment multiplier) is the multiplier by which
aggregate demand will increase when there is an increase in
transfer payments
In macroeconomics and finance, a transfer payment (also called a government transfer or simply transfer) is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. Th ...
(e.g., welfare spending, unemployment payments).
Transfer payments are not in the same theoretical category as
government spending on goods and services because such payments are not directly injected into a goods market. Instead, the spendable funds are transferred to a member of the public, who then may spend some or all of them. For this reason, transfer payments are analyzed as negative
taxes
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
, and their
multiplier is usually considered to be equal in magnitude but opposite in sign (specifically positive rather than negative) from that of taxes.
One dollar of transfer payments results in up to one dollar of spending by the recipient. In turn, the recipient of that spending has experienced an increase in income and spends a portion of it on more goods, giving the next person income some of which is spent, etc. The result of this chain reaction may be that aggregate spending, and hence equilibrium
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
, has gone up by more than the original dollar. However, the size of this multiplier effect is likely to be diminished by two considerations: first, an upward push that the new spending gives to
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s, which diminishes spending on goods such as
physical capital
Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the produ ...
and
consumer durables
In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be consid ...
; and second, an upward push that the spending gives to the general price level, which diminishes the quantity of
aggregate demand for several reasons .
Because not all the original dollar is necessarily spent by the recipient of the transfer payment, the resulting multiplier is likely to be somewhat less than the
multiplier of government spending on goods and services.
See also
*
Complex multiplier
Notes
References
''Essential Foundations of Economics 4e''''Economics of Social Issues''
Economics effects
Payments
Keynesian economics
{{Econ-theory-stub