Question

Suppose that one million unemployed persons in a country are receiving Rs. 6000 per month per person as an unemployment allowance. If the government, instead of paying unemployment allowance, hires all of them at the same amount (Rs. 6000 per month per person) and engages them in digging the pits and filling the same pits. What will be the effect on GDP?

• A. No effect on GDP
• B. GDP will rise.
• C. GDP will fall.
• D. The effect on GDP will be uncertain.

Answer 1

The Correct Option is B

This question involves understanding the impact on Gross Domestic Product (GDP) when unemployed individuals in a country are hired by the government. The key concept here is how GDP is calculated and what components affect it.

1. Understanding GDP:
   • GDP stands for Gross Domestic Product and is the total value of all goods and services produced within a country's borders in a specific time period.
   • There are several approaches to calculating GDP, including the expenditure approach, which considers consumption, investment, government spending, and net exports.
   • In this context, government spending is our area of focus.
2. Impact of Unemployment Allowance on GDP:
   • When the government pays unemployment allowances, it is providing financial support without expecting a direct economic output from recipients.
   • This allowance is essentially a transfer payment and does not directly contribute to GDP since it does not involve the production of goods or services.
3. Impact of Hiring Unemployed Individuals:
   • When the government hires unemployed individuals and pays them to engage in a specific task (e.g., digging and filling pits), this spending is considered government expenditure on services.
   • This activity contributes directly to GDP because it involves the production of a service, despite the lack of economic utility (as the task itself might not add functional value).
   • The key distinction here is the transition from non-productive financial support to productive government spending.
4. Conclusion:
   • By hiring unemployed individuals, there is a shift from transfer payments, which do not impact GDP, to government spending on services, which increases GDP.
   • Hence, GDP will rise as a result of this change in government policy.

The most appropriate choice is therefore: GDP will rise.