If the government increases unemployment benefits while total production remains unchanged, what is the direct effect on GDP?
Answer and explanation
Correct answer: There will be no direct effect because it is a transfer payment
The governing concept is that GDP measures the market value of currently produced final goods and services. Unemployment benefits are transfer payments: they redistribute purchasing power but are not payments for newly produced output. Therefore, with total production unchanged, GDP does not directly change. Government purchases of goods or services would enter GDP, but transfers themselves do not.
Frequently asked questions
What is the correct answer to this question?
There will be no direct effect because it is a transfer payment
Why is this the correct answer?
The governing concept is that GDP measures the market value of currently produced final goods and services. Unemployment benefits are transfer payments: they redistribute purchasing power but are not payments for newly produced output. Therefore, with total production unchanged, GDP does not directly change. Government purchases of goods or services would enter GDP, but transfers themselves do not.
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.
