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1. Three Approaches in calculating GDP
2. Three Approaches Mary spends a final good $10, the market value is $10, the income to the factors is $10
National Expenditure =National Output = National Income
1. Expenditure approach
2. Output approach
3. Income approach
3. Expenditure Approach GDP = C + I + G + (X- M)
C = Private consumption expenditure
I = Investment Expenditure
G= Government Consumption Expenditure
X = Value of Exports
M = Value of Imports
4. Main points Expenditure on final goods and services
Expenditure on imports needed to be deducted from the calculation
5. C= Private Consumption Expenditure (C) 1. Second Hand Goods
Ans: Exclude.There is no current production
2. Commission spent on buying a second-hand bag
Ans: Include. Current production
expenditure on illegal goods/services
Ans: Exclude. No official record
6. Investment Expenditure (I) = Gross Domestic Fixed Capital Formation +
Change in Stock (Inventories)
Gross Domestic Fixed Capital Formation:
Expenditure on purchasing land, factories, flats, office, machinery, commission, legal charges
7. Investment Expenditure (I) Investors spend on intermediate goods and services
E.g. raw materials, electricity charges, water charges
Ans: Excluded because the value of the final goods already include the value of the intermediate goods and services.
8. Investment Expenditure (I) I = Gross domestic fixed capital formation + Change in stock
Gross domestic fixed capital formation = Net domestic fixed capital formation + depreciation
I = Net domestic fixed capital formation + depreciation + Change in stock
9. Gross domestic fixed capital formation An investor spent $1 million to buy 10 new printing machines and spent $10 000 to repair the old printing machines.
= Net domestic fixed capital formation ($1 million) + depreciation ($10 000)
10. Investment Expenditure (I) Change in Stock (Inventories)
07 Output Value of Easons CDs = $10 000
Sales = $8 000
Stock = +$2 000
GDP = C + I + G + (X M)
= +$8 000 + $2 000 + 0 + (0-0)
11. Investment Expenditure (I) Change in stock:
E.g. 07 Output value of U2 clothing
= $50 000
Sales = $70 000
Stock = -$20 000
GDP= C + I + G + (X- M)
= +$ 70 000 + (-$20 000) +0+ (0-0)
12. Investment expenditure G2000 bought a new office in Tsuen Wan at $2 million. It spent $70 000 on buying an old lorry and spent $20 000 on buying cloth from a HK importer.
The total consumer expenditure on G2000 this year is $5 million. And the value of its stock increases by $0.5Mn
13. Government Expenditure (G) Items Included:
e.g. Housing allowance of civil servants
e.g. Medical allowance of civil servants
e.g. Expenditure on building new airport
Transfer Payment/Public Assistance
14. Net Exports (X-M) = Domestic Exports of goods
+ Re-exports of goods
+ Exports of Services
- Imports of Goods
- Imports of Services
Count the VALUES of import and export
15. Net Exports (X-M) Exports of services
Spending of foreign tourists in HK
e.g. transportation services
e.g. insurance / banking services
e.g. medical services
e.g. retail services (souvenirs)
e.g. hotel accommodation services
16. Why we have to deduct import of goods and services? Why exclude it? A HK resident bought a new LV bag in a HK boutique = $6 000
The import value = $2 500
GDP = C + I + G + (X- M)
= $6 000 + 0 + 0 + (0 - $2500)
It reflects the production by our RPUs.
17. Expenditure on shares and stock Today, Ms May Chan bought $10 000 shares of China Coal at the price $7.88 per unit. The commission fee given to the share dealer is $500 and the stamp duty is $100.
Two weeks later, Ms May Chan decided to sell it at the price $8.8
How much will be included in Hong Kongs Gross Domestic Product?
18. Production (Valued-added) approach Measures the total market value of all final goods and services
It is difficult to distinguish between intermediate goods and final goods.
To avoid double counting, valued-added method is used.
19. Production Approach (Value-added Approach) GDP= sum of value-added of RPUs
1. Farmers value-added
= $2 (Wheat) 0 (Cost) = $2
2. Flour-making factory
= $3.5 (Flour) - $2 (Wheat) = $1.5
3. Bakery Shop
= $6 (Bread) - $3.5 (Flour) = $2.5
20. Income approach Measure the sum of income for the factors of production distributed by the RPUs.
The rewards to their production of goods and provision of services.
21. Income included or excluded? Scholarships to students
Commission received by stock brokers
Insurance compensation to injured workers
Gift cheque to a bride
22. GDP at factor cost In theory, no government intervention
local production of cigarettes $24,
Market value = factor income
= total cost
= total value-added =$24
But if there is indirect tax or subsidies,
Market value ?total value-added
23. GDP at factor cost
e.g. 1: cigarettes : market price =$24
Indirect business tax = $4
GDP at market price = $24
GDP at factor cost = $24 - $4 = $20 = total value-added
24. GDP at factor cost e.g. 2: education in university
Total value-added in university =$140
Subsidy = $20
School fee = $120
GDP at market price = $120
GDP at factor cost = $120 + $20 = $140
= total value-added
25. GDP at factor cost GDP at factor cost (total value-added)
= GDP at market price
indirect business tax (IBT)
+ Subsidies (S)
26. Three formula: GDP at market price=C+I+G+(X-M)
GDP at factor cost=sum of value added
GDP at factor cost
= wage+rent+interest+gross profits+depreciation
GDP at factor cost + indirect business taxes subsidies
= GDP at market price
27. Gross National Product It measures the total income earned by residents of an economy from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside, in a specified period.
28. Gross National Product Income earned involved in economic activities (production) and
Income earned by residents (individuals / organizations) and
The economic activities are carried out within or outside the economic territory and
In a current year
29. Gross National Product From GDP to GNP:
GNP = GDP + Income earned by residents outside the economic territory - Income earned by non-residents within the economic territory.
GNP = GDP + Net Factor Income from abroad (NIA)
NIA = Net External factor income flows
30. GDP vs GNP Under what situation when GDP is greater than GNP?
Income earned by non-residents locally is greater than income earned by residents abroad
Net Income from abroad is negative
31. Based on TB P.33 Table 2.3 In 1999-2001, Is it visible trade deficit or surplus or balanced?
In 1999-2001, Is it invisible trade deficit or surplus or balanced?
Is it net exports positive or negative?
Why change in inventories is negative?
32. Based on TB P.35 table 2.6 The Net External Factor Income Flow=
Net Factor Income from abroad
It is always positive, what does it imply?
33. Per capita GDP GDP / population size
If we compare HKs GDP with Chinas GDP, which one is larger?
If we compare HKs per capita GDP with Chinas GDP, which one is larger?
34. GDP at market price = Nominal GDP
= Money GDP
= GDP at current market price
35. Real GDP To remove the effects of price change,
We have Real GDP,
= GDP at constant market price
= Price in base year x Output in current year
36. Implicit GDP deflator It is to reflect the change in the general price level of goods and services.
= Price Index
We assume the implicit GDP deflator is 100 in the base year.
37. Implicit GDP deflator =
If the index is greater than 100, it means that there is inflation compared with the base year.
38. Money GDP growth rate Money GDP growth rate
39. Inflation rate =
40. Growth rate The growth rate can be positive and negative.
If the growth rate is negative, it implies that the new one is less than the old one
41. Compare money GDP growth rate and inflation rate If the money GDP growth rate is greater than the inflation rate,
It implies that the output increases in the current year. Then the real GDP increases in comparison.
42. TB P.33 Table 1 and 2 Compare GDP at current market prices and GDP at constant (1990) market prices, which one is bigger?
2001 GDPmp= 2001 mp x 2001 output
2001 real GDP = 1990 mp x 2001 output
=> 2001 market price > 1990 market price
43. TB P.33 table 2 From 99 to 01, did the output in HK increase?
Yes. As 01 real > 00 real > 99 real GDP
99 real GDP = 90 mp x 99 output
00 real GDP = 90 mp x 00 output
01 real GDP = 90 mp x 01 output
44. TB P.33 table 2 Compare 00 and 01 real GDP, 01>00
It implies output has increased.
But compare 00 and 01 per capita real GDP,
What does it imply?
Which year population size is greater?