Three Approaches in calculating GDP

Three ApproachesMary spends a final good $10, the market value is $10, the income to the factors is $10National Expenditure =National Output = National Income1. Expenditure approach2. Output approach3. Income approach

Expenditure ApproachGDP = C + I + G + (X- M)C = Private consumption expenditureI = Investment ExpenditureG= Government Consumption ExpenditureX = Value of ExportsM = Value of Imports

Main pointsExpenditure on final goods and servicesExpenditure on imports needed to be deducted from the calculation

C= Private Consumption Expenditure (C) 1.Second Hand GoodsAns: Exclude.There is no current production2. Commission spent on buying a second-hand bagAns: Include. Current productionexpenditure 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, water chargesAns: Excluded because the value of the final 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 + depreciationI = Net domestic fixed capital formation + depreciation + Change in stock

Gross domestic fixed capital formationAn 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.107 Output Value of Easons 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 expenditureG2000 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 ServicesCount 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 000The import value = $2 500GDP = C + I + G + (X- M) = $6 000 + 0 + 0 + (0 - $2500)It reflects the production by our RPUs.

Expenditure on shares and stockToday, 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 $8.8How much will be included in Hong Kongs Gross Domestic Product?

Production (Valued-added) approachMeasures the total market value of all final goods and servicesIt 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 approachMeasure 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 studentsCommission received by stock brokersInsurance compensation to injured workersGift 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 coste.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 costGDP 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+depreciationGDP at factor cost + indirect business taxes subsidies = GDP at market price

Gross National ProductIt 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 ProductIncome earned involved in economic activities (production) andIncome earned by residents (individuals / organizations) andThe economic activities are carried out within or outside the economic territory andIn a current year

Gross National ProductFrom 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 GNPUnder what situation when GDP is greater than GNP?Income earned by non-residents locally is greater than income earned by residents abroadNet Income from abroad is negative

Based on TB P.33 Table 2.3In 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?

Based on TB P.35 table 2.6The 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 HKs GDP with Chinas GDP, which one is larger?

If we compare HKs per capita GDP with Chinas GDP, which one is larger?

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

Real GDPTo 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 deflatorIt 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.

Money GDP growth rateMoney GDP growth rate=

Inflation rate=

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 rateIf 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 2Compare 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 price

TB P.33 table 2From 99 to 01, did the output in HK increase?Yes. As 01 real > 00 real > 99 real GDP99 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 2Compare 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