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NSS Exploring Economics 5

Chapter 1

Measurement of economic performance (I) GDP and GNP

Questions
P.2
Think it over
1.
Hong Kong people are hardworking and productive. How do we measure our total output?
2.
Our logistics industry is important to our economy. How do we measure its contribution to
our economy?

P.3
Test yourself
1.1
Are the following items stocks or flows?
a. The number of Cokes in a refrigerator
b. Your savings deposit in a bank.
c. Output of toys per day
d. Birth rate of a country

P.5
Test yourself
1.2
Are the following resident producing units of Hong Kong?
a. A foreign domestic helper
b. An employee of the Bank of East Asia
c. Branches of the Bank of East Asia in Hong Kong
d. The Bank of East Asia (China) Limited (a subsidiary of the Bank of East Asia in the
mainland of China)

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Questions and Answers to Exercises (Chapter 1)

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P.5
cartoon
In two minutes, try to recite the definition of GDP:
GDP is the ____________ of _________ of all __________ of a country or territory in a
specified period.

P.8
Test yourself
1.3
Determine whether the following items are final products or intermediate products.
a. Cloth bought by a housewife for making clothing for her children
b. Cloth bought by a domestic garment factory for producing clothing for sale
c. Cloth exported to a foreign garment factory for producing clothing for sale
d. A sewing machine bought by a domestic garment factory for producing clothing for sale

P.16
Discuss
1.1
How should the following government expenditures be treated in calculating GDP?
a. Expenditure of government departments which are engaged in market activities
b. Government investment expenditure
P.19
Test yourself
1.4
Are the following items included in the GDP calculated by the expenditure approach? Put a
tick to indicate to which expenditure component(s) they belong.
Is it included in
the calculation of
GDP?
a. Commission paid by a household for the
purchase of a second-hand private car

yes/no

b. A households expenditure on shares

yes/no

c. Market value of a T-shirt produced last


year but which remained unsold this year

yes/no

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d. A households expenditure on a currently


produced sewing machine

yes/no

e. Compensation paid to a traffic accident


victim

yes/no

f. Foreign expenditure on domestic exports


of toys

yes/no

g. A households expenditure on an imported


computer

yes/no

P.21
Discuss
1.2
Refer to Table 1.1. Rank the ratios of various expenditure components (C, I, G and NX) to
GDP in 2008 in descending order. What can you find?
P.23
Test yourself
1.5
Should the following items be deducted from the revenue of a coffee shop to obtain its valueadded?
Deducted

Not deducted

a. Shop rent paid to a


property developer
b. Wage payments
c. Electricity and water
charges
d. Cost of coffee beans
purchased
e. Profit of entrepreneurs
f. Depreciation of fixed
capital purchased
g. Expenditure on the
purchase of fixed
capital

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Questions and Answers to Exercises (Chapter 1)

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P.27
Test yourself
1.6
Suppose an actor from Taiwan was employed by Hong Kong Disneyland to stage a show for
six months. Are Hong Kong Disneyland and the actor Hong Kong residents?

P.28
Test yourself
1.7
Are the following items included in GDP or/and GNP? Are they external factor income
flows?
Included in
GDP?

Included in
GNP?

Is it external
factor income
flow?
If so, is it an
inflow or
outflow?

a. Dividends from US shares held


by Hong Kong residents
b. Salary of a Filipino maid
working in Hong Kong for
three years
c. Payment to a US consultant
hired by the MTR Corporation
Limited on a three-month
contract
d. Expenditure on goods exported
by a resident producing unit

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Questions and Answers to Exercises (Chapter 1)

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P.29
Test yourself
1.8
Refer to the table below. From 2004 to 2008, which one was larger, GDP or GNP? Must GNP
be larger than GDP? Explain.

# Revised figures
Source: 2009 Gross Domestic Product, Census and Statistics Department
Table 1.3 External factor income flows, GDP and GNP (at current market prices) in
Hong Kong

P.33-36
Exercises
Multiple Choice Questions
1.
GDP is equal to
A.the total value of production of all resident producing units of a country or territory in a
specified period.
B. the total value of production of all residents of a country or territory in a specified period.
C.the total cost of production of all resident producing units of a country or territory in a
specified period.
D.the total income of all residents of a country or territory in a specified period.

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2*.
Which of the following is EXCLUDED from the calculation of Hong Kong's GDP?
A. A gift cheque given as a birthday gift
B. Estimated rent of an owner-occupied residential unit
C. Stamp duty paid for the transaction of premises
D. The value of unsold periodicals published during the year
3.
Which of the following expenditure components are valued at cost instead of market value?
A. Private consumption expenditure
B. Changes in inventories
C. Government consumption expenditure
D. Net exports
4**.
Which of the following is NOT counted in gross investment expenditure?
A. Property developers expenditure on constructing residential flats
B. The expenditure on imported sewing machines for a garment factory
C. Government expenditure on infrastructure
D. The expenditure on photocopiers for re-export use
5*.
The following table shows the gross domestic product data of a country.

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The gross domestic product (in million dollars) is


A. 940.
B. 970.
C. 1,340.
D. 1,370.
6.
Which of the following descriptions about the production approach is correct?
A. Value-added of a resident producing unit is equal to the difference between the value of its
output and the value of its inputs.
B. To avoid double counting, the value of intermediate consumption should not be counted.
C. The sum of value-added of all resident producing units is equal to GDP at market prices.
D. Taxes on production and imports should be included in GDP because they measure the
value of production contributed by the government.
7.
In calculating the value-added of a beauty salon, which of the following items should NOT be
deducted?
A. Tips to employees
B. Expenditure on shampoo and hair gel
C. Rent on the premises
D. Water charges

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Questions and Answers to Exercises (Chapter 1)

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8**.
Which of the following is a component of net income from abroad?
A. The sales revenue of Hong Kong garments exported to the Philippines
B. The salaries of Filipino maids on a two-year contract
C. The remittances of Filipino maids to relatives in the Philippines
D. Profits received from branches of a Hong Kong employment agency in the Philippines
9.
Gross national product is smaller than gross domestic product when
A. net exports are negative.
B. net income from abroad is negative.
C. depreciation is positive.
D. indirect taxes less subsidies are positive.

10*.
The following table shows the gross national product data of a country.

The total value-added of all resident producing units of the country is


A. $13,460 million.
B. $13,580 million.
C. $14,300 million.
D. $14,420 million.

Short Questions.
1*.

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State whether each of the following statements is true, false or uncertain. Briefly explain your
answer.
a. Under the expenditure approach, the value of all transactions is counted in GDP.
(5 marks)
b. GDP is smaller than GNP when net income from abroad increases.
(3 marks)
2.
Which expenditure component(s) in the expenditure approach would be affected by the
following hypothetical transactions? Explain your answer.
a. A private investor buys 2,000 shares of China Life Insurance (Overseas) Company Limited
at $100,000. He pays $500 in commission and levies and $100 in stamp duty.
(4 marks)
b. The Social Welfare Department spends $10 million on compensation of employees, $1
million on renewal of its computer system and $18,000 million on Comprehensive Social
Security Assistance.
(6 marks)

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3.
The following diagram shows the production stages of a shirt.

Find the value-added of each firm. Then use the results to find the market value of the final
product.
(6 marks)
4*.
The sales revenue of a toy factory is $1 million this year. Explain why it is possible that its
contribution to GDP is less than $1 million.
(4 marks)
Structured Questions.
1.
a. Define gross domestic product and gross national product.
(4 marks)
b. Are GDP and GNP stock or flow?
(3 marks)
c. How can we find GNP from GDP? Under what conditions would they be equal in value?
(3 marks)
d. Suppose a Hong Kong toy factory begins to import workers from the mainland of China
without affecting the production and income of domestic workers employed. As a result,
the profit of the factory increases substantially. How does this affect the GDP and GNP of
Hong Kong, respectively,
i. if the imported workers are on a six-month contract?
(7 marks)
ii. if the imported workers are on a three-year contract?
(7 marks)

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2.
The following table shows the GDP data of Hong Kong in 2000.

Source: Census and Statistics Department


a. Name the method of GDP measurement used in the above table.
b. Find A.
c. Calculate GNP if GDP in 2000 was $1,318 billion.
d. Explain why the value of re-exports of goods could be larger than GDP.
e. Explain why imports have to be deducted to find GDP in this approach.

(1 mark)
(2 marks)
(2 marks)
(4 marks)
(2 marks)

3. Study the following production chain.

a. Calculate the GDP at factor cost of Economy B by the production approach.


(4 marks)
b. Calculate the GDP at market prices of Economy B by the expenditure approach. (2 marks)
c. Explain how the problem of double counting is avoided in the two approaches. (4 marks)
d. Explain why indirect taxes less subsidies have to be added to find GDP at market price in
the production approach.
(4 marks)

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Activities
p.36
2.
Discuss whether the following payments are included in Hong Kongs GDP and/or GNP.
a. Commission received by a local property agent for his service to a foreign company in
selling a commercial flat
b. Dividends paid by a local property agency to foreign shareholders
c. A donation of US$10,000 made by a US tourist to a local charitable organisation
d. The rental income received by a Hong Kong resident from his property in Australia

Answers
P.2
Think it over
1. Gross domestic product or gross national product, which measures the total market value
of our output (to be explained on p.4 and p.27, respectively).
2. Its contribution is measured by its value-added (to be explained in p.22).
P.3
Test yourself
1.1
a. Stock. The quantity is measured at a certain point in time.
b. Stock. The quantity is measured at a certain point in time.
c. Flow. The quantity is measured in a certain period of time.
d. Flow. The quantity is measured in a certain period of time.
P.5
Test yourself
1.2
a. Yes, a foreign domestic helper engages or intends to engage in his/her major economic
activities (including production) in Hong Kong over a year.
b. No, an employee of the Bank of East Asia is not an independent institutional unit, but the
Bank is.
c. Yes, branches of the Bank of East Asia in Hong Kong engages in its major economic

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activities (including production) in Hong Kong over a year.


d. No, the Bank of East Asia (China) Limited engages in its major economic activities
(including production) in the mainland of China, instead of Hong Kong.
P.5
cartoon
GDP is the total (market) value of production of all resident producing units of a country or
territory in a specified period.
P.8
Test yourself
1.3
a. Final product. The cloth is used for final consumption of the household, not for sale.
b. Intermediate product. The cloth is used up as inputs in the production of clothing for sale.
c. Final product. Being exported is the final use of the cloth in Hong Kong.
d. Final product. The sewing machine is used for final consumption of the firm, because it is
not used up in production within a year and it is not for sale.
P.16
Discuss
1.1
a. The products of government departments which are engaged in market activities and
public corporations are principally for sale to the public. Similar to private enterprises,
most of their expenditures on goods and services belong to intermediate consumption,
used up as inputs. To avoid double counting, they are not counted in GDP. Only their
expenditures on fixed capital and inventories are counted in GDP as gross investment
expenditure.
b.

Government investment expenditures of government departments, public corporations


and quasi-government non-profit institutions are counted in GDP as gross investment
expenditure.

P.19
Test yourself

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1.4
Is it included
in the
calculation of
GDP?

Explanation

a. Commission paid
by a household for
the purchase of a
second-hand
private car

yes

b. A households
expenditure on
shares

no

Only a minor portion


(the commission,
transaction levies and
stamp duty paid) are
included in C.

c. Market value of a
T-shirt produced
last year but which
remained unsold
this year

no

It is not current
production.

d. A households
expenditure on a
currently produced
sewing machine

yes

e. Compensation paid
to a traffic accident
victim

no

f. Foreign expenditure
on domestic exports
of toys

yes

g. A households
expenditure on an
imported computer

no

NSS Exploring Economics 5


Questions and Answers to Exercises (Chapter 1)

This is a transfer
payment.

14

As the computer is not


produced by a resident
producing unit, only
the expenditure on
local middleman
service is counted in C.

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P.21
Discuss
1.2
The ratios of various expenditure components to GDP in 2008 in descending order are as
follows:
Private consumption expenditure
Gross domestic fixed capital formation
Net exports
Government consumption expenditure
Changes in inventories

61.04%
19.95%
10.18%
8.32%
0.50%

About 61% of the aggregate output in 2008 was privately consumed, which was the largest
component.
The gross domestic fixed capital formation was about 20%, which was the second largest
component.
Net exports were around 10%, which was positive in most years. Since the total value of
exports (incurring receipt of foreign currencies) is larger than the total value of imports
(incurring payment of foreign currencies) over a long period of time, our foreign exchange
reserves (total amount of foreign currencies accumulated) continuously increase.
About 8% of the aggregate output was publicly consumed. The portion of government
consumption expenditure was relatively small due to our big market, small government
policy.
Changes in inventories were less than 1% because most final products were used.
P.23
Test yourself
1.5
Deducted
a. Shop rent paid to a
property developer

Not deducted

b. Wage payments

c. Electricity and water charges

d. Cost of coffee beans purchased

e. Profit of entrepreneurs

f. Depreciation of fixed capital


purchased

g. Expenditure on the purchase of

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fixed capital

P.27
Test yourself
1.6
Hong Kong Disneyland is a Hong Kong resident but the actor is not. This is because Hong
Kong Disneyland engages in its major economic activities in Hong Kong over a year but the
actor does not.
P.28
Test yourself
1.7
Included in
GDP?

Included in
GNP?

Is it external
factor income
flow?
If so, is it an
inflow or
outflow?

a. Dividends from US shares held (from a US


by Hong Kong residents
producing unit

(to a HK

(inflow)

b. Salary of a Filipino maid


working in Hong Kong for
three years

(a HK

(also a HK

(no cross

producing unit)

resident)

boundary
income flow)

(from a HK
c. Payment to a US consultant
hired by the MTR Corporation producing unit)
Limited on a three-month
contract

(to a US

(outfow)

d. Expenditure on goods exported (a HK


by a resident producing unit
producing unit)

(involves a

(not an income)

sales revenue,
not factor
income)

resident)

resident)

P.29
Test yourself
1.8
GNP is larger in the period concerned. Yet, it is not a must. GNP is larger than GDP only if

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net income from abroad is positive, i.e., inflow is larger than outflow.

P.33-36
Exercises
Multiple Choice Questions
1. A
2.

A
A gift cheque is a gift, not a payment for current production.

3.

4.

D
It is counted in exports.

5.

D
GDP = C + I + G + NX = $[600 + (300 + 20) + 50 + (500 + 600 800 + 100)] million
= $1,370 million
(Note that changes in inventories is included in net domestic capital formation.)

6.

B
Option D is incorrect. They raise the buyers expenditures and are reflected in market
values of the final products. However, they are not the value of the governments
production.

7.

A
Tips are payments to factors directly employed by the beauty salon while others are
payments to other producing units. The former are counted in the value-added of the
beauty salon while the latter are not.

8.

D
Option A is sales revenue, not factor income.
Option B does not involve external factor income flow.
Option C is a transfer of wealth, not factor income.
Option D is factor income from abroad (that residents received income from nonresident producing units).

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9.

B
GNP = GDP + Net income from abroad
If GNP is smaller than GDP, net income from abroad must be negative.

10. B
GNP = GDP + Net income from abroad
= Total value-added + Indirect taxes Subsidies + Net income from abroad
14,000 million = Total value-added + (100 80 + 2,000 1,600) million
Total value-added = (14,000 100 + 80 2,000 + 1,600) million = 13,580 million
Short Questions
1 a. False. Under the expenditure approach, only the values of final products produced by all
resident producing units in the specified period are counted in GDP. (1 mark)
Hence the values of the following transactions are not counted in GDP:
Transactions not involving production (such as transactions of financial assets and
transfer payments)
Intermediate products
Production of non-resident producing units (such as imports)
Goods not currently produced (such as past inventories and second-hand goods)
(Any two correct examples. 2 marks each.)
1 b. False
GNP = GDP + Net income from abroad
GNP GDP = Net income from abroad (1 mark)
So if GDP is smaller (larger) than GNP, the difference between GNP and GDP is positive
(negative). This condition is that net income from abroad is larger (smaller) than zero.
Whether net income from abroad increases, decreases or remains unchanged is irrelevant.
(2 marks)
2 a. The transaction would raise the private consumption expenditure by $600 (= $500 +
$100); these are expenditures on currently produced services and indirect taxes. (2 marks)
However, the purchase price of share is not counted in any expenditure components, as it is
not an expenditure on current production. (2 marks)

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2 b. The transaction would raise government consumption expenditure by $10 million


(expenditure on employee services) and gross domestic capital formation by $1 million
(expenditure on the renewal of the computer system). (4 marks)
Since Comprehensive Social Security Assistance is a transfer payment, it is not an
expenditure component. (2 marks)
3.
Value-added of Firm A = $3 $0 = $3
Value-added of Firm B = $10 $3 = $7
Value-added of Firm C = $20 $10 = $10
Value-added of Firm D = $60 $20 = $40
Value-added of Firm E = $125 $5 $60 = $60
(1 mark each)
Market value of final product = Sum of value-added + Indirect taxes Subsidies
= ($3 + $7 + $10 + $40 + $60) + $5 = $125 (1 mark)
4.
Contribution to GDP = Value-added = Value of output Value of intermediate consumption
Sales revenue is equal to value of output. Contribution of the toy factory is smaller than its
sales revenue because its intermediate consumption (payments to other producing units) is
greater than zero. (2 marks)
Possible intermediate consumption includes expenditures on imports, raw materials,
electricity, water, renting premises, banking and insurance services, storage and
transportation, etc. Moreover, the value of past inventories is not counted in GDP.
(Any two correct examples. Each 1 mark.)
Structured Questions.
1 a. Gross domestic product is the total market value of production of all resident producing
units of a country or territory in a specified period. (2 marks)
Gross national product is the total income earned by residents of a country or territory
from engaging in various economic activities in a specified period. (2 marks)

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1 b. Both GDP and GNP are flows because their quantities are measured in a period of time.
(3 marks)
1 c. GNP = GDP + Net income from abroad (1 mark)
GNP equals GDP if net income from abroad is equal to zero. This happens
when the country or territory is a closed economy or
when the country or territory is an open economy, its factor income received from
abroad equals its factor income paid abroad. (2 marks)
1 d. i. GDP is the total value of production of all resident producing units while GNP is the
total income earned by residents.
The toy factory which imported workers from the mainland of China is a resident
producing unit of Hong Kong. The contribution of imported workers raises the value of
production of the factory without affecting the production and income of local workers.
Hence, the total value of production of the toy factory increases and so does the GDP.
(3 marks)
Since the imported workers are on a six-month contract, they are not residents of Hong
Kong. Their incomes are not counted in Hong Kongs GNP. Though the incomes of
local workers remain unchanged, the profit of the toy factory entrepreneur(s) increase.
Hence, the total income of residents increases and so does the GNP. (4 marks)
1 d. ii. The toy factory which imported workers from the mainland of China is a resident
producing unit of Hong Kong. The contribution of imported workers raises the value of
production of the factory without affecting the production and income of local workers.
Hence, the total value of the toy factorys production increases and so does the GDP.
(3 marks)
Since the imported workers are on a three-year contract, they are residents of Hong
Kong. Their incomes are counted in the GNP of Hong Kong. Besides, while the
incomes of local workers remain unchanged, the profi t of the toy factory
entrepreneur(s) increases. Hence, the total income of residents increases and so does
the GNP. (4 marks)
2 a. Expenditure approach (1 mark)

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2 b. GDP = C + I + G + NX of goods + NX of services


100% = 59.0% + (A% + 1.1%) + 9.1% + (-4.9%) + (23.9% 14.6%) = 73.6% + A%
A = 100 73.6 = 26.4 (2 marks)
2 c. GNP = GDP + Net external factor income fl ows = $1,318 billion + 0.7% $1,318
billion = $1,327.2 billion (2 marks)
2 d. The contribution of re-exports of goods to GDP is measured by the value-added, which
is equal to the value of output minus the value of intermediate consumption. (2 marks)
Although the value of output of re-exports was larger than GDP in 2000, provided that
the value of intermediate consumption of re-exports was large enough, the value-added
of re-exports (a component of GDP) was still smaller than GDP. (2 marks)
2 e. Imports are not produced by resident producing units of the territory, but their values
have been included in the final expenditures of households, firms, the government and
the foreign sector. Therefore, imports have to be deducted from the final expenditures to
find GDP. (2 marks)
3 a. By the production approach, GDP at factor cost of Economy B = Sum of value-added of
resident producing units of Economy B
Value-added of the seafood wholesaler: $60,000 + $80,000 $100,000 = $40,000
Value-added of the restaurant: $200,000 $10,000 $60,000 = $130,000
Value-added of the retailers: $100,000 $5,000 $80,000 = $15,000
(1 mark each)
Hence, GDP at factor cost of Economy B = $40,000 + $130,000 + $15,000 = $185,000
(1 mark)
3 b. By the expenditure approach, GDP at market prices
=C+I+G+XM
= $100,000 + $0 + $0 + $200,000 $100,000
= $200,000 (2 marks)
3 c. In the production approach, to avoid double counting, when we calculate the
contribution of a producing unit or its value-added, we deduct the value of intermediate
consumption from the value of output. This is because the former reflects the
contribution of other producing units, instead of the producing unit concerned. (2 marks)

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In the expenditure approach, to avoid double counting, only the value of final products is
counted, but the value of intermediate products is not. This is because the former
includes the latter. (2 marks)
3 d. In the production approach, the sum of value-added is equal to the GDP at factor cost.
The imposition of indirect taxes raises market prices above factor costs while the
imposition of subsidies lowers market prices below factor costs. Hence, to find the
GDP at market prices, indirect taxes should be added to the GDP at factor cost while
subsidies should be subtracted from it.
(4 marks)
Activities
p.36
2.
a. The commission is a payment for the service of a resident producing unit as well as the
income of a resident of Hong Kong. Therefore, its value is counted in both HKs GDP and
GNP.
b. The dividend is distributed by a resident producing unit (from its value of production) to a
non-resident. Therefore, its value is counted in HKs GDP but is not counted in its GNP.
c. The donation is a transfer payment, not reflecting value of current production. Therefore, it
is counted in neither HKs GDP nor its GNP.
d. The rental is a payment for residential services provided by an Australian producing unit as
well as income of a HK resident. Therefore, it is not counted in HKs GDP but is counted
in HKs GNP.

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