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Economics. Chapter 1 National Income. Measuring indicators. Do you think Hong Kong is a rich city? Why? In what way do we measure the economic performance of a city? Indicators Income Employment / Unemployment Production Consumption Price level Living standard Freedom. Price ($). S.

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economics

Economics

Chapter 1

National Income

measuring indicators
Measuring indicators
  • Do you think Hong Kong is a rich city? Why?
  • In what way do we measure the economic performance of a city?
    • Indicators
      • Income
      • Employment / Unemployment
      • Production
      • Consumption
      • Price level
      • Living standard
      • Freedom
slide3

Price ($)

S

P

  • In microeconomics,
    • Price
    • Quantity
  • In macroeconomics,
    • General price level
    • Aggregate output

D

Quantity

(units)

0

Q

General price level ($)

AS

P

AD

Aggregate output

(units)

0

Q

national income
National income
  • Measurement of output
    • Output or income a region gets from production within a period of time (usually one year)
    • Measure the aggregate output by adding up the market values of different outputs
    • It shows:
      • economic development
      • quality of life
stock and flow concepts
Stock and flow concepts
  • Stock
    • Value of output = a quantity measured

at a certain point of time

      • Wealth = market value of one’s possessions at a

certain point of time

      • Capital stock = value of capital owned by a firm at a

certain point of time

    • E.g.
      • Investment of the year (increase in capital owned)
      • Depreciation (decrease in capital owned)
stock and flow concepts1
Stock and flow concepts
  • Flow
    • Value of output = a quantity measured

in a period of time (i.e. rate)

      • Income & expenditure

= inflow and outflow of money in a certain period of time

      • Investment and depreciation

= increase and decrease in the value capital owned

in a certain period of time

http://www.reffonomics.com/TRB/chapter21/GDP/realgdp4.swf

  • GDP is a flow, because it is measured yearly.
national income1
National income
  • Measurement of aggregate output
    • GDP = Gross domestic product
    • GNP = Gross national product
slide8
GDP
  • The total value of production of all resident producing units of a region in a specific period (usually a year or quarter).

or

  • It is the market value of all final goods and services produced inside a country in a year (or a quarter).
slide9
GDP
  • Resident producing units of a region
    • Individuals:
      • People who normally live in the region
      • E.g. HK citizens
    • Organizations:
      • Companies taking the region as the centre of economic interest
      • E.g. 7-Eleven
    • Imported goods are excluded
slide10
GDP
  • Total value of final goods and services.
  • Value of final goods = $1,000
  • If value of intermediate and final goods are counted ($400+$1000), it will be double counting ($400)

Intermediate good

Fish: $400

Final goods

Sushi: $1000

Pay: $1000

Earn: $400

Earn: $1000 - $400 = $600

items not counted in gdp
Items not counted in GDP
  • Past inventories
    • Not produced within the period
    • Already counted in the GDP in previous period
  • Second-hand goods
    • Already counted when produced in the first time
    • Double counting
  • Unpaid household services for self-consumption within household
    • Housework
    • Caring of own children
items not counted in gdp1
Items not counted in GDP
  • Intermediate products
    • Goods and services used up as inputs
    • E.g.
      • Raw materials
      • Semi-finished goods
  • Financial assets
    • Shares and bonds
    • Futures and options
  • Transfer payment
    • Transfer of wealth, no production involve
    • E.g. Gov’t subsidy, CSSA
  • Capital gain
    • Increase in the market value of an asset, but not production
    • E.g. Selling the flat with a higher price
should the following be included in calculation of gdp in 2010
Should the following be included in calculation of GDP in 2010?

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No

Yes / No Yes / No

Yes / No

Yes / No

  • Stock of MP3 players produced in 2008
  • Stock of MP3 players produced in 2010
  • Sony α3 camera resold in Yahoo! Auction
  • Canon D5 camera sold in Broadway
  • Hourly paid private tutor help you revising Economics
  • You help your brother understanding his Math problems
  • Adidas football you bought for fun
  • Adidas football South China Athletics Asso. bought for training the football players
  • HSBC shares
  • Commission to an agent from buying and selling HSBC shares
  • Clinical voucher (醫療劵) given by the gov’t (without using it)
  • Clinical voucher (醫療劵) given by the gov’t (after using it)
  • A person has $2 million gain from selling his ancient flask
  • Cheung Kong (Holdings) Ltd. gain $1000million from selling the flats in a new estate
basic concept of measuring gdp
Basic concept of measuring GDP

Income = $50

Output value = $50

Expenditure = $50

Output value = Expenditure = Income

slide15

Basic concept of measuring GDP

A. Three approaches for GDP

  • Expenditure approach
    • Final goods
  • Production approach
    • Output value of producing units
  • Income approach
    • Factor income
slide16

Basic concept of measuring GDP

B. GDP at market price and factor cost

Given: Unit tax = $1200 and Subsidy = $200

GDPMP = GDPFC + Indirect taxes – Subsidies

Output value

$3000

Tax

$1200

Subsidy

$200

GDPFC

Expenditure

$4000

GDPMP

Tax

$1200

Subsidy

$200

Income

$3000

slide17

Expenditure approach

  • Total expenditure on final goods
  • Subtract (not include) the value of imports

GDP = C + I + G + X - M

Import

Export

Gov’t expenditure

Gross Investment expenditure

Private consumption expenditure

slide18

Expenditure approach

C - Private consumption expenditure (C)

  • Household expenditure on goods and services

G - Government consumption expenditure

  • Compensation of civil servants (e.g. salary)
  • Purchasing good or services
  • Not include: transfer payment
slide19

Expenditure approach

I - Gross investment expenditure (I)

  • Capital formation
  • Change in inventories
  • Depreciation included
  • Gross investment (I)

= Gross domestic fixed capital formation + Change in inventory

= Net domestic fixed capital formation + Depreciation + Change in inventory

= Net investment + Depreciation

slide20

Expenditure approach

X - Exports

  • Selling goods or services to foreign countries
  • Total exports = Xgoods + Xservices + Xre-exports

M - Imports

  • Purchasing goods or services from foreign countries
  • Total import = Mgoods + Mservices

Net exports (NX) = X - M

slide21

Expenditure approach

  • The net domestic product (NDP)
    • Equals the gross domestic product (GDP) minus depreciation on a country's capital goods.
    • Capital that has been consumed over the year
      • in the form of housing, vehicle, or machinery deterioration.
    • Capital consumption allowance
      • the amount of capital that would be needed to replace those depreciated assets.
    • NDP = GDP - Depreciation
calculate gdp p 16
Calculate GDP (p.16)
    • Net exports = X – M
    • = (Xgoods + Xservices + Xre-exports )– (Mgoods + Mservices)
    • = $[(100 + 13 + 15 ) – (80 + 20)] billion= $28 billion
    • GDP = C + I + G + X – M
    • = $ ( 80 + 20 + 15 -8 + 100 + 15 + 13 – 80 – 20 ) billion
  • = $ 135 billion
calculate gdp1
Calculate GDP

(HKCEE 2001, Q28)

slide26

Value added (Production) approach

  • The sum of value added of all resident producing unit.
  • Counting of value from one production stage to another
  • The value of intermediate goods will be counted.

Value added = Gross output value – Intermediate consumption

$500

$800

A

B

C

B

Value added by = $800 – $500 = $300

slide27

Value added (Production) approach

  • E.g.

$200

$850

$1800

Carpenter

Value of timber sold from carpenter to factory

Value of sofa sold from factory to retailer

Value of sofa sold from retailer to household

Household

Shop

Factory

slide28

Value added (Production) approach

$850

$300

  • E.g.

Farmer

Smoker

Factory

$200

  • Market price of cigar = $850, Tax to Gov’t = $200
  • Factory receives from smoker = $850-$200 = $650
  • Value added by the factory = $650 - $300 = $350
  • Consider production only:GDPFC = $300 + $350 = $650
  • Consider also the tax:GDPMP = $300 + $350 + $200 = $850

Consider production only:GDPFC= Sum of value added of all resident production units

Tax to Gov’t

Consider the market value

GDPMP = GDPFC + Indirect tax - Subsidies

gdp from value added and expenditure approaches
GDP from value added and expenditure approaches

Indirect tax less subsidies

Private consumption expenditure (C)

Import contents in C, I, G and X

Value added of all producing units

Gross investment expenditure (I)

GDPMP

Government consumption expenditure (G)

GDPFC

Export (X)[Goods and services]

GDPMP = GDPFC+ Indirect tax - Subsidies

GDPMP = C + I + G + X - M

slide30

Advantages of value added approach

  • Difficult to distinguish final goods and intermediate goods
    • E.g. A chef buys a fish. The fish can be:
      • Final goods – if the chef enjoy himself.
      • Intermediate goods – if he cook the fish and sell it.
    • So, value added is better than expenditure approach
  • Avoid double counting
    • All value added are counted for once.
example p 20
Example (p.20)
  • The diagram below shows the operation of C&K Furniture.
  • Its total sales revenue is $6,600.

1. a. GDP contributed by C&K = ?

b. Why the contribution is lower than the total revenue?

2. Tax rate = 10% of the sales. Indirect tax = ? C&K’s contribution to GDPFC = ?

Local made furniture

$3,000

C&K Furniture

Change in inventory - $800

Local consumers

Imported furniture

$1,000

Sales revenue

$6,600

(indirect tax inclusive)

example p 201
Example (p.20)
  • The diagram below shows the operation of C&K Furniture.

Q.1

  • GDP contributed by C&K

= $6,600 - $800 - $3,000 - $1,000

= $1,800

  • The value added of other producing units (local and foreign furniture suppliers) and the value of the sold inventories must be subtracted from the total sales to get C&K’s contribution to GDP.

Q.2

Let y be the sales (or value of goods)

Market value = Sales + Tax = $6,600

y + (y x 10%) = 6600

y = 6000,  Indirect tax = $6000 x 10% = $600

GDPFC (contributed by C&K) = GDPMP (by C&K) – Indirect tax

= $1,800 - $600 = $1,200

Consider the market value

GDPMP = GDPFC + Indirect tax - Subsidies

slide33

Income approach (out of syllabus)

  • The sum of all factor incomes
    • Compensation
      • Return for the labour resources
      • E.g. Salaries, bonus, commission, housing allowance…
    • Gross operating surplus
      • Return to company’s capital and entrepreneurship
      • E.g. Dividends, interests, shares…
slide34

Per capita GDP

  • GDP divided by population
    • to study the living standard of the region
    • to eliminate the factor of population difference
    • can reflect the amount every person can get on average
  • E.g. Given in country A:
    • GDP = $5000 million
    • Population = 10 million persons
slide35

Growth rate

  • % gain or lose in GDP
    • To study the economic growth
    • To forecast the economic situation, so that to make appropriate decisions
  • E.g. Given in country A:
    • GDP2010 = $5000 million and GDP2009 = $4000 million
  • Economy with GDP growth rate > 10% is consider well economic growth
  • PRC Gov’t aims at 8% growth in recently years
slide36

Gross Domestic Product (GDP) of HK

HK citizen

Foreigner

HK citizen

HK citizen

Production in HK

Gross National Product (GNP) of HK

Production in HK

and

Production in other countries

slide37

Gross National Product (GNP)

The total income earned by residents from engaging in economic activities in a given period of time.

Assume GNP of Hong Kong in 2010:All income earned by Hong Kong residents (both living in or outside HK) in year 2010.

GDP= Income of local residents in HK + Income of foreigners in HK

GNP= Income of local residents in HK + Income of residents overseas

slide38

Gross National Product (GNP)

GNP

GDP

Factor income from abroad

Factor income paid abroad

=

+

-

So, when calculating GNP,  income of HK residents (living in HK)income of HK residents (living overseas)income of foreigners who’re living in HK (< 2 yrs)

slide39

Gross National Product (GNP)

GNP

GDP

Factor income from abroad

Factor income paid abroad

=

+

-

GNP

GDP

Net factor income from abroad

=

+

slide40

Gross National Product (GNP)

  • Factor income from abroad (inflow)
    • Compensation of employees (domestic residents working overseas)
    • E.g. HK people working in Japan with short-term contract(income not included in GDP, but in GNP)
  • Factor income paid abroad (outflow)
    • Compensation of employees (foreign residents working in local)
    • E.g. US lecturer working in HK for 6 months(income included in GDP, but not in GNP)
slide41

Gross National Product (GNP)

  • Factor income from abroad (inflow)
    • Investment income (domestic residents invest overseas)
    • E.g. HK people gain profits from selling flats in US(income not included in GDP, but in GNP of HK)
  • Factor income paid abroad (outflow)
    • Investment income (foreign residents invest in local)
    • E.g. US investor earn profit from his computer retailer shop in HK(income included in GDP, but not in GNP of HK)
slide42

Gross National Product (GNP)

  • Assume GDP of HK in 2010 is $100 million.
  • Inflow
    • HK citizens gain $30million profit from investment in US
    • HK salesmen earn $5 million income from a short-term contract in Japan
  • Outflow
    • A UK citizen earn $1 million income for lecturing in HK University
    • An Italian business gain $10 million by investing a restaurant in HK
  • GNP = GDP + Income from abroad – Income paid abroad

= [$100 + ($30 + $5) – ($1 + $10) ]million = $124 million

slide43

Gross National Product (GNP)

GDPMP = GDPFC + Indirect taxes – Subsidies

$600million = GDPFC + ($10 - $5)million GDPFC = ($600 - $10 + $5) millionSo, GDP at factor cost = $595 million

GNP = GDP + Net income from abroad= ($600 + $15) million= $615 million

GDP at market price= C + I + G + X – M= ($200+$250+$100+$80-$30)million= $600 million

slide44

Nominal GDP

  • In principle
    • GDP = total market value at market price
    • Measures “of the current period”
      • i.e. GDP at current market prices
    • Specified as: Nominal GDP
    • General formula = P x Q where P=Current price
    • From above date, Nominal GDP but overall production remains unchanged
slide45

Real GDP

  • To compare the output of different period
  • Assume the price is constant
      • i.e. GDP at contant market prices
    • Specified as: Real GDP
    • General formula = P0 x Q where P0= Price in the base year
    • From above date, Real GDP remains unchanged even though the current price 
slide46

Real GDP (textbook p.28)

  • GDP of 2000 at current market price = $10x2,000 + $20x2,000 = $60000
  • GDP of 2004 at current market price = $15x1,000 + $25x1,800 = $60000
  • Nominal GDP2004 = Nominal GDP2000
  • It can’t reflect changes in output because changes in price also affect GDP at current market price
  • Base year = 2000
    • GDP of 2000 at constant price = $10x2,000 + $20x2,000 = $60,000
    • GDP of 2004 at current market price = $10x1,000 + $20x1,800 = $46,000
    • Real GDP2004 < Rea GDP2000
slide51

Uses of national income statistics

  • To assess the economic performance of an economy
    • Real GDP
      • measures the change of aggregate output.
    • Growth rate of real GDP
      • the economic growth.
      • how fast an economy expends
      • if negative, shows financial crisis
    • Investment expenditure
      • prediction to boost future consumption
      • evaluate economic development
slide52

Uses of national income statistics

  • Understand economic structure and changes
    • From above data, importance of tertiary production importance of primary and secondary production
slide53

Uses of national income statistics

  • To reflect the economic welfare
    • Per capita GDP
      • aggregate output a person can enjoy on average
    • Components in expenditure approach
      • how aggregate output is used for:
        • Private consumption?
        • Public consumption?
        • Net export?
  • To facilitate international comparison
    • Real GDP
      • which countries / regions have good economic performance?
slide54

Uses of national income statistics

  • To provide information for the gov’t in making economic policies
    • Growth rate of real GDP
      • more intensive polices to stimulate economic growth
    • Components in expenditure approach
      • which components show difficulties?
        • Private consumption   Tax allowance to stimulate consumption
        • Net export  formulate international trading policies, e.g. CEPA
  • To help firms make production and investment
    • Growth rate of value-added of different economic sectors
      • make business plan and efficient investment
slide55

Limitations of national income statistics

  • Differences in population, price and components of goods
    • Consider GDP only:
      • Assume nominal GDP = $10million in both economy
      • Population of Country A = 5,000 persons
      • Population of Country B = 100,000 persons
      • Country A has better living standard.
    • Case study on textbook p.33
slide56

Limitations of national income statistics

  • Exclusion of unpaid household services for self consumption
    • Production does improve living standard
    • GDP under-estimates economic welfare
  • Underground (or hidden) economic activities
    • illegal production (e.g. smuggling and piracy)
    • unreported production (e.g. retailing of hawker and private tutoring)
    • Non-marketed production (e.g. farming for self-consumption)
    • GDP may not fully reflect economic welfare
slide57

Limitations of national income statistics

  • The value of leisure time
    • not included in GDP calculation
    • GDP can’t reflect the living standard
    • if Country A and B have the same figure, more the leisure time  higher the living standard
  • Difference in income distribution
    • uneven income distribution
    • per capita GDP over-estimates the general living standard of the poor
slide58

Limitations of national income statistics

  • Externalities
    • GDP does not reflect external cost from production (e.g. pollution)
    • GDP over-estimates the living standard
  • Changes in price level
    • Nominal GDP does not take away the effect of inflation
    • Nominal GDP over-estimates the living standard
    • Need to make use of real GDP, but more complicated in calculation
  • Composition of output
    • Private and public consumption  better living standard
    • investment or net export  no effect on improving living standard
    • GDP as a figure can’t fully reflect the living standard