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Why are transfer payments such as pensions excluded from national income?
AThey are paid only to retired government employees
BThey are paid without adding anything to production
CThey are always financed by borrowing from abroad
DThey are counted instead within the disposable income
Answer & Solution
Correct answer: B. They are paid without adding anything to production
1. Government makes payments in the form of pensions, unemployment allowances and subsidies, which are government expenditure.
2. These are not included in national income because they are paid without adding anything to the production process.
3. The textbook adds that interest on national debt is also treated as a transfer payment, since it is paid on past savings without any productive work.
4. Transfer payments are nonetheless included in personal income, which is why personal income is never equal to national income.
_Source: TN HSC Class 12 Economics (Samacheer Kalvi, Govt of Tamil Nadu), Ch 2 "National Income", §2.7.1_
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