Three Approaches in calculating GDP Three Approaches

Three Approaches in calculating GDP

Three Approaches n n n 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) n C = Private consumption expenditure n I = Investment Expenditure n G= Government Consumption Expenditure n X = Value of Exports n M = Value of Imports

Main points n n Expenditure on final goods and services Expenditure on imports needed to be deducted from the calculation

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 3. expenditure on illegal goods/services Ans: 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 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.

Investment Expenditure (I) n n n 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 n n 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) n n n Change in Stock (Inventories) E. g. 1 07 Output Value of Eason’s CDs = $10 000 Sales = $8 000 Stock = +$2 000 GDP = C + I + G + (X –M) = +$8 000 + $2 000 + (0 -0)

Investment Expenditure (I) Change in stock: E. g. 07 Output value of U 2 clothing = $50 000 Sales = $70 000 Stock = -$20 000 GDP= C + I + G + (X- M) = +$ 70 000 + (-$20 000) +0+ (0 -0) n

Investment expenditure n n G 2000 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 G 2000 this year is $5 million. And the value of its stock increases by $0. 5 Mn

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 Items Excluded: Transfer Payment/Public Assistance

Net Exports (X-M) n n = 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) n 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

Why we have to deduct import of goods and services? Why exclude it? n n n 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 - $2500) It reflects the production by our RPUs.

Expenditure on shares and stock n n n 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 n n n 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 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 n

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? n n Scholarships to students Commission received by stock brokers Insurance compensation to injured workers Gift cheque to a bride

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

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

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

GDP at factor cost (total value-added) = GDP at market price – indirect business tax (IBT) + Subsidies (S)

Three formula: n GDP at market price=C+I+G+(X-M) n GDP at factor cost=sum of value added GDP at factor cost = wage+rent+interest+gross profits+depreciation n GDP at factor cost + indirect business taxes – subsidies = GDP at market price n

Gross National Product n 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 n n 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 n n 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 n n n 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. 2. 3. 4. 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?

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 n n n 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.

Money GDP growth rate =

Inflation rate =

Growth rate n n 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 n n 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 output 2001 real GDP = 1990 mp x 2001 output => 2001 market price > 1990 market price n

TB P. 33 table 2 From 99 to 01, did the output in HK increase? n Yes. As 01 real > 00 real > 99 real GDP = 90 mp x 99 output 00 real GDP = 90 mp x 00 output 01 real GDP = 90 mp x 01 output n

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? 01