1 12.National Income Accounting (1) 2 Chapter 12 : main menu 12.1Gross Domestic Product Concept...

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12. National Income Accounting (1)

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Chapter 12 : main menu12.1 Gross Domestic Product

Concept Explorer 12.1

Progress Checkpoint 1

12.2 Approaches of measuring GDP Theory in Life 12.1

Progress Checkpoint 212.3 Production (value-added) approach

12.4 Expenditure approach Progress Checkpoint 3

12.5 Income approach


Theory in Life 12.2

Theory in Life 12.3


12.6Gross domestic product Vs Gross national product



12.7Income and transactions excluded from national income accounting

Theory in Life 12.4


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Understanding resident producing units What does the term “resident producing units” in the definit

ion of GDP refer to? Resident producing units refer to the production units which

: maintain a centre of economic interest in the economic territor

y of the country or region (以該地區為主要經濟活動中心 ), may carry out production within or outside the economic territ

ory of a region, and may employ the residents or non-residents of an economy duri

ng production.

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Examples of HK resident producing units

Not examples of HK resident producing units

Television Broadcast Limited Manchester United Football Club

Microsoft Hong Kong Limited Intel Corporation in US

Hong Kong Dragon Airlines Limited

Zhongguo Renmin Yinhang (中國人民銀行 )


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ABC Garment has set up factories in mainland China to produce clothing. Is the value of the clothing included in the GDP of Hong Kong?

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Uncertain. If ABC Garment is a RPU of Hong Kong, the value of the clothing is included in HK’s GDP; vice versa.


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Theory in Life : 12.1

In reality, under the production approach, GDP figures are obtained by the value-added method. Why is there such a need to use this method?

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The following example illustrates the need to use the value-added method.

Suppose we know that a farmer sells vegetables to a restaurant for $20. The restaurant, using the vegetables, prepares a meal for customers at a price of $100. In such case, the vegetables sold by the farmer is an intermediate good, while the meal sold by the restaurant is a final good. The value of final output (i.e. the meal) is $100. Hence GDP will be increased by $100.


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In practice, it is impossible to know perfectly the details of production of every output. We may be unable to distinguish intermediate from final goods, and hence wrongly regard the vegetables as a final good. When we add up $20 and $100, we conclude that GDP is increased by $120. Obviously, this is incorrect.


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This leads to the problem of double counting: the value of intermediate goods is counted twice. This problem emerges due to the difficulty in distinguishing intermediate and final goods. To avoid such problem, the value-added method is used instead. Under such method, there is no need to distinguish intermediate and final goods.


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The following table shows the prices and quantities of four types of goods produced by an economy in 2004:

Goods Prices Quantity produced

A $250 12,000

B $300 27,000

C $100 25,000

D $350 75,000

Calculate the GDP of the economy using output approach. Show your working

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GDP = PiQi

= $250 x 12 000 + $300 x 27 000 + $100 x 25 000 + $350 x 75 000

= $(3 + 8.1 + 2.5 + 26.25) million

= $39.85 million or $39,850,000


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Progress Checkpoint 3 Study the following diagram :

fishermen food processingfirm

fishcaught

($1200)

hotels householdsset dinner

($1000)

hawkers householdsfish balls

($800)

canned fish

freshfish

($850)

($650)

Calculate the contribution of the production chain to GDP by

(a) the expenditure approach, and

(b) the value-added method. Show your working.

(c) Explain why the use of EACH of these two measurement methods will not lead to the problem of double counting.

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(a) GDP = $(1,000 + 800)

= $1,800 (b) GDP = $[(1,200 – 0) + (850 + 650 – 1,200) +

(1,000 – 850) + (800 – 650)]

= $1,800 (c) For the value-added method, since only the added

value of each stage is counted, there is no problem of double counting.

For the expenditure approach, since only the expenditures on final goods are added, there is no problem of double counting.


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Given the following table:GDP components $ million

Private consumption expenditure 3200

Government consumption expenditure 2500

Gross domestic fixed capital formation 2700

Increase in stocks 300

Domestic exports of goods 1500

Re-exports of goods 600

Imports of goods 350

Exports of services 250

Imports of services 450


(a) Calculate the value of Gross Domestic Product. Show your working.

(b) Name the approach you used in (a).

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(a) GDPMP = C + I + G + X – M

= $(3200 + 2500 + 2700 + 300 + 1500 +

600 – 350 + 250 – 450)m

= $10,250m

(b) It is the expenditure approach.


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Estimating the value of some non-marketed output

GDP is supposed to measure the market value of currently produced final output. But some output without market value is also included in GDP. What are they? How is their value estimated?

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1) Firms producing capital goods for its own useA digital movie company produces a computer software for its own use but does not sell the software in the market. The value of the software is also included in GDP, and its value is estimated by its production cost.

2) Owner-occupied apartmentAn apartment is occupied by its owner, and no (explicit) rent is paid. Yet, there is a flow of accommodation service provided. Hence the value of such service is also estimated and included in GDP.


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Theory in Life 12.2 GDP at factor cost When taxes are imposed and subsidies are provided, the

sum of value-added of all production stages cannot be inferred from the market value of final output, i.e. GDP at market price does not accurately reflect the total value of production. How do we isolate the effects of sales taxes and subsidies on GDP figures to find the sum of value-added?

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Indirect business taxes or sales taxes Suppose the market value of a box of wine is $10,000. Out of

this, $7,000 is the value-added from production, while $3,000 is the sales tax. Hence to find the value-added from production, we need to subtract indirect business tax from the market value, i.e.

Value added from production

= Market value – indirect business tax

= $10,000 - $7,000

= $3,000

Theory in Life 12.2

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Subsidy Suppose the market value of a retraining course is $500.

However, a subsidy of $3,500 is provided from the government to the course provider. Hence to find the value-added from production, we need to add subsidy to the market value, i.e.

Value added from production

= Market value + subsidy

= $500 + $3,500

= $4,000

Theory in Life 12.2

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This way of estimating the value-added from all production stages will give us GDP at factor cost, i.e.

GDP at factor cost = GDP at market price –

indirect business taxes + subsidies

= GDP at market price –

indirect business taxes less subsidies

Theory in Life 12.2

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Theory in Life 12.3

Per-capita GDP What is per-capita GDP? How does it help us know the

living standard of an economy?

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Per-capita GDP (按人口平均計算的本地生產總值 ) is the GDP divided by population size. Suppose the GDP of an economy in a year is $1,600 billion . If the population size is 8 million, then per-capita GDP is

Theory in Life 12.3

A higher per-capita GDP usually implies a higher living

standard, ceteris paribus.

$ 1,600,000,000,0008,000,000

= $200,000.

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Given the following data of an economy in a year :

GDP at market price = $600,000m

Indirect business taxes = $25,000m

Subsidies = $35,000 (a) What is the value of indirect business taxes less

subsidies? (b) What is the value of GDP at factor cost?

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(a) Indirect business taxes less subsidies

= Indirect business tax – subsidies

= $(25,000 – 35,000)m

= -$10,000m (b) GDP at factor cost

= GDP at market price – indirect business taxes

less subsidies

= $(600,000 – (–10,000)) m

= $610,000m


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Suppose the per-capita GDP of an economy is $300,000, and the population size is 2 million. What is the value of GDP?


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Per-capita GDP = GDP/ Population Size

$300,000 = GDP/ 2,000,000

$600,000,000,000 = GDP

GDP = $600 billion


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Progress Checkpoint 5 Given the following data of an economy in a year :

GDP = $20,000m

Factor income from abroad = $150m

Factor income paid abroad = $120m

(a) What is the value of net factor income from

abroad? (b) What is the value of GNP?

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(a) Net factor income from abroad

= Factor income from abroad – factor income paid abroad

= $(150 – 120)m

= $30m (b) GNP

= GDP + net factor income from abroad

= $(20,000 + 30)m

= $20,030m


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What does the term “residents” in the definition of GNP refer to?

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Residents of an economy include both individuals and organizations.

For individuals, residents refer to the people (irrespective of their nationality) who normally stay (or intend to stay) in the economic territory on a long term (> 1 year) basis. For organizations, residents refer to those which normally operate in the economic territory. The residence status of both individuals and organizations only depends on their centre of economic interests.


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Examples of HK residents Not examples of HK residents

A Filipino maid who has signed a two-year contract as a domestic helper in Hong Kong.

Lawson 24-hour convenience stores in Japan.

Microsoft Hong Kong Limited located in Cyberport.

The Universal Studio movie theme park in Los Angeles.

Pakistan workers who have signed a two-year contract for working in the construction site of Disneyland in Hong Kong.

Mr. Ni Kuang (倪匡 ), a famous science fiction writer, who has been living in Canada on a long term basis.


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The income earned by HK residents from abroad is excluded in HK GDP but included in HK GNP.

The income earned by non HK residents within HK is included in HK’s GDP but excluded in HK’s GNP.

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Theory in Life 12.4

Sales revenue of a firm Vs its contribution to GDP; total value of all transactions Vs GDP

The revenue of Cheung Kong (Holdings) Limited from the sales of apartment in 2003 was $2 billion. Is its contribution to GDP also $2 billion? Hong Kong’s GDP in 2002 was $1,260 billion. Is the total value of all market transactions also $1,260 billion?

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The contribution of Cheung Kong (Holdings) Limited to HK’s GDP in 2003 was less than $2 billion. This is because :

1. it might have purchased some raw materials or intermediate goods produced by other firms in the process of apartment construction, and2. some apartment sold in 2003 were produced in previous years.

The total value of all market transactions in 2002 was greater than $1,260 billion. This is because such total value includes the value of intermediate goods, inventories produced in previous years, unreported market transactions, shares and bonds transactions and imports. But these items are not include in GDP figures.

Theory in Life 12.4

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Are the following items included in Hong Kong’s GDP? Explain.

(a) The money paid to the recipients under the Comprehensive Social Security Assistance Scheme (綜合社會保障援助計劃 ).

(b) The salaries paid to the employees of the Social Welfare Department.


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(a) No, it is not included in HK’s GDP, as it does not involve currently produced final output.

(b) Yes, it is included in HK’s GDP, as it is the payment for the current service provided by the employees.


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End of Chapter 12

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