Government purchases include spending on goods and services by local, state, and federal governments. It includes the salaries of government workers and spending on public works. Recently, the income accounts have switched to the longer label government consumption expenditure and gross investment, but in this book. we will use the traditional and shorter term government purchases [he meaning of government purchases requires a bit of clarification. When the government pays the salary of an Army general. that salary is part of government purchases. But what happens when the government pays a Social Security benefit to one of the elderly? Such government spending is called a transfer payment because it is not made in exchange for a currently produced good or service. Transfer payments alter household income, but they do not reflect’ the economy’s production. (From a macroeconomic standpoint, transfer payments are like negative taxes.) Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are no counted as part of government purchases.

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