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?

Solution

If the government hires the unemployed persons and pays them the same amount they were receiving as an unemployment allowance, and engages them in any form of economic activity (even if it is digging and filling pits), the payments become part of government expenditure on wages. In national income accounting, government expenditure on goods and services, including wages paid to employees, is counted as part of GDP. Therefore, hiring the unemployed persons and paying them for their labor will increase the government expenditure component of GDP.