If the government gives an unemployment allowance, why is it not directly added to GDP?
Answer and explanation
Correct answer: It is not a payment for current production
An unemployment allowance is a transfer payment: the government transfers purchasing power to a person without receiving a currently produced good or service in return. GDP measures the value of current production, so the allowance itself is not counted as production. If the recipient later spends it on newly produced goods or services, that resulting expenditure may enter GDP through the relevant component. Therefore, option A is correct.
Frequently asked questions
What is the correct answer to this question?
It is not a payment for current production
Why is this the correct answer?
An unemployment allowance is a transfer payment: the government transfers purchasing power to a person without receiving a currently produced good or service in return. GDP measures the value of current production, so the allowance itself is not counted as production. If the recipient later spends it on newly produced goods or services, that resulting expenditure may enter GDP through the relevant component. Therefore, option A is correct.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
