Suppose one million unemployed persons receive Rs. 6000 per month per person as an unemployment allowance. If the government instead hires all of them at the same amount (Rs. 6000 per month per person) to dig pits and fill the same pits, what will be the effect on GDP?
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Answer: (B)
An unemployment allowance is a transfer payment and is not counted in GDP. Once the same people are hired and paid the same amount to perform work, their wages represent a government service that is produced and is included in GDP at cost.
So the spending that was previously a transfer now enters output. GDP rises, option (B), even though the digging and filling adds nothing of market value.
It is tempting to say the payment is unchanged, so GDP is unchanged; the key point is the change in classification from a transfer (excluded) to compensation for a produced service (included).
National income accounting has come up 132 times in 6 exams since 2010.
This question is on What counts in GDP, part of National income accounting in Macroeconomics.
The boundary of GDP: which transactions and goods are counted and which are not.
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Question from the IIT JAM 2022 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.