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February 9, 2023 

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BANK PANIC OF 1907: A relatively serious economic downturn, that is business-cycle contraction, in 1907 that was caused by serious, big-time, instability in the banking system. This major bank panic was so severe (the term depression is more applicable than recession) that it prompted Congress to establish the Federal Reserve System, which came into existence in 1913. See fractional-reserve banking.

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BUSINESS TRANSFER PAYMENTS:

Payments by the business sector to the household sector without any corresponding production. Business transfer payments are essentially gifts, or subsidies, made to the household sector from the business sector. At the aggregated level, this is one of several key differences between national income (the resource cost of production) and gross (and net) domestic product (the market value of production). Business transfer payments (BTP) tend to be quite small, invariably less than 1 percent of gross domestic product.
Business transfer payments are transfers from the business sector to the household sector. A portion of business transfer payments are, in fact, outright gifts to the household sector (such as student scholarships, nonprofit foundation grants). However, a substantial portion results when unpaid debts are "written off." In effect, when the business sector "writes off" and unpaid debt, they are giving the household sector "free" goods. The household sector incurs these debts to purchase output produced by the business sector. The household sector receives the goods, but the business sector is never paid, they receive no revenue. In essence, it is just as if the business sector gave these goods to the household sector as gifts.

Suppose, for example, that Lisa Quirkenstone purchases a bunch of goods from the MegaMart Discount Warehouse Super Center using her MegaMart Discount Warehouse Super Center installment credit card, a common practice in the retail industry. Of course, had she used her OmniBank Platinum Credit Card to purchase these goods, the point of this story would remain essentially unchanged.

In principle, Lisa would pay off this debt over time, a little bit this month and a little bit next month. This is how the "buying-on-credit" system is suppose to work. However, what would happen if she fails to pay off this debt? Perhaps she encounters a bit of bad luck, such as an extended illness that eats away her entire life savings shortly after she is laid off from work. She is flat broke and cannot afford to pay her MegaMart Discount Warehouse Super Center debt.

Alternatively, she could be just a worthless deadbeat. She never intended to pay MegaMart Discount Warehouse Super Center for these goods. Once her truck is filled with goods, she simple leaves for greener pastures.

Whatever the reason for her nonpayment of this debt, MegaMart Discount Warehouse Super Center, that is the business sector, is left holding a empty money bag. Once they realize that she is NEVER going to pay her debt, they write it off as uncollectable. She gets the goods, they get nothing. It is, well, it is just as if they GAVE Lisa those goods as a birthday present, just not willingly.

Business transfer payments are a part of gross domestic product that never makes it to national income. Business transfer payments are included in the value of the final goods produced (after all, Lisa did receive value from the goods that she "bought" from the MegaMart Discount Warehouse Super Center), but they do not generate any revenue that can be used as factor payments (or national income). Business transfer payments can be thought of as an extra cost tacked onto the price of goods, over and above factor payments, that compensates for bad debts incurred by the household sector.

<= BUSINESS SECTORBUYERS' EXPECTATIONS, DEMAND DETERMINANT =>


Recommended Citation:

BUSINESS TRANSFER PAYMENTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: February 9, 2023].


Check Out These Related Terms...

     | national income and gross domestic product | national income and net domestic product | indirect business taxes | capital consumption adjustment | net foreign factor income | statistical discrepancy | government subsidies less current surplus of government enterprises |


Or For A Little Background...

     | national income | gross domestic product | gross domestic product, income | production | product markets | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |


And For Further Study...

     | factor payments | circular flow | business cycles | gross domestic product, expenditures | gross domestic product, ins and outs | gross domestic product, welfare | real gross domestic product | gross national product | government functions | net domestic product | personal income | disposable income | gross domestic income |


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