Three Approaches in calculating GDP

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

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

Main points

Expenditure on final goods and services

Expenditure on imports needed to be deducted from the calculation

C= Private Consumption Expenditure (C)

1. Second Hand GoodsAns: Exclude.There is no current product

ion2. Commission spent on buying a seco

nd-hand bagAns: Include. Current production3. expenditure on illegal goods/servicesAns: Exclude. No official record

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

Investment Expenditure (I)Investors spend on intermediate goods

and servicesE.g. raw materials, electricity charges, w

ater chargesAns: Excluded because the value of the f

inal goods already include the value of the intermediate goods and services.

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

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)

Investment Expenditure (I) Change in Stock (Inventories) E.g.1 07 Output Value of Eason’s CDs = $10

000Sales = $8 000

Stock = +$2 000GDP = C + I + G + (X –M)

= +$8 000 + $2 000 + 0 + (0-0)

Investment Expenditure (I)

Change in stock:E.g. 07 Output value of U2 clothing = $50 000Sales = $70 000Stock = -$20 000GDP= C + I + G + (X- M) = +$ 70 000 + (-$20 000) +0+ (0-

0)

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

Government Expenditure (G)

Items Included:e.g. Housing allowance of civil servantse.g. Medical allowance of civil servantse.g. Expenditure on building new airportItems Excluded:Transfer Payment/Public Assistance

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

Net Exports (X-M)

Exports of servicesSpending of foreign tourists in HKe.g. transportation servicese.g. insurance / banking servicese.g. medical servicese.g. retail services (souvenirs)

e.g. hotel accommodation services

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.

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 Kong’s Gross Domestic Product?

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.

Production Approach (Value-added Approach)

GDP= sum of value-added of RPUs1. Farmers’ value-added = $2 (Wheat) – 0 (Cost) = $22. Flour-making factory

= $3.5 (Flour) - $2 (Wheat) = $1.53. Bakery Shop

= $6 (Bread) - $3.5 (Flour) = $2.5

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.

Income included or excluded? Scholarships to students Commission received by stock broker

s Insurance compensation to injured w

orkers Gift cheque to a bride

GDP at factor costIn theory, no government interventionlocal 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

GDP at factor cost

e.g. 1: cigarettes : market price =$24Indirect business tax = $4GDP at market price = $24GDP at factor cost = $24 - $4 = $20

= total value-added

GDP at factor cost

e.g. 2: education in universityTotal value-added in university

=$140Subsidy = $20School fee = $120GDP at market price = $120GDP at factor cost = $120 + $20 =

$140 = total value-added

GDP at factor cost

GDP at factor cost (total value-added)

= GDP at market price – indirect business tax (IBT) + Subsidies (S)

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+depreciatio

n GDP at factor cost + indirect business taxes –su

bsidies = GDP at market price

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.

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

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

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

Based on TB P.33 Table 2.3

1. In 1999-2001, Is it visible trade deficit or surplus or balanced?

2. In 1999-2001, Is it invisible trade deficit or surplus or balanced?

3. Is it net exports positive or negative?

4. Why change in inventories is negative?

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?

Per capita GDP GDP / population size

If we compare HK’s GDP with China’s GDP, which one is larger?

If we compare HK’s per capita GDP with China’s GDP, which one is larger?

GDP at market price

= Nominal GDP= Money GDP= GDP at current market price

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

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.

Implicit GDP deflator

=

If the index is greater than 100, it means that there is inflation compared with the base year.

100x GDP Real

GDPMoney

Money GDP growth rate

Money GDP growth rate= x100%

GDPmoney Old

GDPmoney oldGDPmoney new

Inflation rate

= x100%

deflator GDP old

deflator GDP olddeflator GDP new

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

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.

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 output2001 real GDP = 1990 mp x 2001 output=> 2001 market price > 1990 market pric

e

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 output00 real GDP = 90 mp x 00 output01 real GDP = 90 mp x 01 output

TB P.33 table 2

Compare 00 and 01 real GDP, 01>00It implies output has increased.But compare 00 and 01 per capita

real GDP,What does it imply?Which year population size is greater?01