Question

With the impact of rapidly rising unemployment in the economy from the partial shutdown due to the covid pandemic, unemployment compensation has become a major source of income for a large segment of the population. Everything else equal, the impact on GDP of this increased unemployment compensation is which of the following?

a.

GDP should go up because the payments are part of income.

b.

GDP should go down because the recipients must have worked in the past to qualify for payments.

c.

GDP should remain unchanged because the payments are transfer payments.

d.

GDP should remain unchanged because the payments reduce business profits by the amount of the compensation.

Answer 1

Gross domestic product takes into account only factor income.

It does not takes into account transfer payments.

It has been stated that because of partial lockdown, unemployment compensation has become a major source of income for a large segment of population.

Unemployment compensation is a transfer payment. Being a transfer payment, it would not be included in the GDP even though large number of people are using it to meet their expenses.

Thus,

GDP should remain unchanged because the payments are transfer payments.

Hence, the correct answer is the option (c).

answered by: anonymous