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Three Approaches in Calculating GDP
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
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
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)
Change in Stock (Inventories) E.g.1 07 Output Value of Easons CDs = $10 000 Sales = $8 000 Stock = +$2 000 GDP = C + I + G + (X M) = +$8 000 + $2 000 + 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
= Domestic Exports of goods + Re-exports of goods + Exports of Services - Imports of Goods - Imports of Services Count the VALUES of import and export
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?
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.
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 Kongs Gross Domestic Product?
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.
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.
Scholarships to students Commission received by stock brokers Insurance compensation to injured workers Gift cheque to a bride
Three formula:
GDP at factor cost = wage+rent+interest+gross profits+depreciation GDP at factor cost + indirect business taxes subsidies = GDP at market price
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.
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
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
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?
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?
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
= Price Index
We assume the implicit GDP deflator is 100 in the base year.
If the index is greater than 100, it means that there is inflation compared with the base year.
Inflation rate
=
new GDP deflator old GDP deflator x100% old GDP deflator
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
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 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 output 00 real GDP = 90 mp x 00 output 01 real GDP = 90 mp x 01 output
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