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 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)

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 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 (I)

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

= 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 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.

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
Kongs 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, valuedadded 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

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
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

GDP at factor cost (total valueadded)
= 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+depreciation
GDP at factor cost + indirect business taxes
subsidies
= 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 nonresidents 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.

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

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 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

=

Money GDP
x 100
Real GDP

If the index is greater than 100, it

means that there is inflation
compared with the base year.

Money GDP growth rate

Money GDP growth rate
= new money GDP old money GDP x100%
Old money GDP

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

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 output

2001 real GDP = 1990 mp x 2001

output
=> 2001 market price > 1990 market
price

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