1. John’s factory made some chairs and sold them in the domestic market for $30,000 in 2008. 4.

4.The MTR Corporation planned to build the West Island Line, which is an extension of the present Island Line of
(a) State the definition of gross domestic product. (2 marks) the MTR System. The announcement was made in 2008.
(b) Do you think the contribution of John’s factory from producing these chairs to GDP was $30,000? Explain. (3) (a) The construction was expected to begin in 2009 and finish by 2013 or 2014. What is the effect of the
(c) Suppose a fire broke out in the factory and $10,000-worth of the sold chairs were destroyed completely construction on the GDP for 2009? Explain. (2 marks)
before they were delivered to buyer. Fortunately, the buyer bought insurance and she was compensated. (b) As soon as the plan was announced, prices of the flats in the Western District rose by 20% on average.
(i) How would the accident affect the gross investment of 2008? (3 marks) (i) With the aid of a diagram, explain why the prices of the flats rose. (4 marks)
(ii) Do you think the compensation would be included in the calculation of the GDP? Explain. (3 marks) (ii) Peter bought a flat in the Western District in 1998 and he sold it after the plan was announced. Price was
25% higher than before. Explain whether increase in price would be included in GDP for 2008.(3 marks)
2. The following diagram shows the production chain of handbags in Country B. The handbag manufacturer (iii) Peter paid 1% of the price of the flat as commission to a real estate agent. Explain whether this
imports $200 worth of leather. commission would be included in the GDP for 2008. (3 marks)
$300 (c) Suppose MTRC had to raise capital to construct the extension. If you were the chairperson of MTRC, which
$200 Retailer A Consumers
Wholesalers method of raising capital would you choose, issuing shares or bonds? State ONE reason. (2 marks)
$300
$300 $500 Consumers
$200 Handbag Retailer B
Manufacturer 5. The following table shows the GDP data of Country A in 2012. Its GDP at market prices in 2012 is $440 million.
$40 Items $ million
Consumers
Private consumption expenditure X
Government consumption expenditure 120
(a) Calculate the contribution of the above production chain to the GDP of Country B by using Net domestic fixed capital formation 80
Changes in inventories 20
(i) the expenditure approach. (3 marks)
Capital consumption allowance 10
(ii) the value added approach. (3 marks) Net exports 100
(b) Suppose a $70 subsidy is provided to the handbag manufacturer by the government of Country B. Indirect taxes 12
Direct taxes 8
(i) State the relationship between the GDP at market prices and the GDP at factor cost. (2 marks)
Subsidies 16
(ii) How will the GDP at market prices and GDP at factor cost of Country B be affected? (2 marks) (a) Calculate Country A’s GDP at factor cost in 2012. (2 marks)
(b) Find out the value of X. (2 marks)
3.The following table shows the GDP data of Country C in 2009. (c) Two items can be negative in value. Name one and explain why it can be negative in value. (3 marks)
Items $ billion
(d) Should the following items be included in Country A’s GDP at market prices in 2012? Explain your answer.
Private consumption expenditure 80
Government consumption expenditure 60 (i) the money received by Miss Fong from selling the shares of a firm in the stock exchange (3 marks)
Gross domestic fixed capital formation 70 (ii) money paid by Miss Fong to her financial consultant as commission for consulting service he provide. (3)
Net investment 80
Change in inventories 30
Depreciation 20 6. The diagram below shows the production chain of corn oil in economy A.
Net exports 10
$1,000 Corn oil $2,000
Indirect taxes 5 $200 Corn farm A
manufacturer Supermarket
Direct taxes 5
Importe X
Subsidies 3
d $10,000
(a) Calculate the GDP at factor cost of Country C for 2009. (2 marks) material $1,600 $2,500
$500 Corn farm B Corn oil
(b) Mrs. Wong, a resident of Country C, receives $3,500 from her son each month. In August 2009, she traveled manufacturer
Consumers
Y
to China and the trip was paid by her son. She used part of the money her son gave her to buy some books
published by China. (a) Calculate contribution of the above production chain to GDP of economy A by using expenditure approach.
(i) Mrs. Wong does not have to pay for the trip. Is the trip a free good? Explain.(3 marks) (b) Find the contribution of the supermarket to the GDP of economy A. (3 marks)
(ii) Explain whether money Mrs. Wong’s son gave her every month should be included in GDP for 2009. (3) (c) Suppose there is only one supermarket in economy A.
(iii) Explain whether Mrs. Wong’s expenditure on books will affect Country C’s GDP for 2009. (3 marks) (i) What is the market structure of the supermarket? (1 mark)
(ii) State TWO features of this type of market structure. (2 marks)
7. The following table shows the GDP data of Country A in 20X9. 10. Refer to the following statistical information of Country X in 2006 and 2011.
Gross Domestic Product (GDP) Components $ million 2006 2011
Private consumption expenditure 750 Gross domestic product (GDP) ($ 45,000 58,000
Government consumption expenditure 500 million)
Gross domestic fixed capital formation X Net external factor income flow ($ 8,000 A
Changes in inventories −50 million)
Net exports 100 Population (million) 15 16
Indirect taxes 15 (a) Calculate the gross national product of Country X in 2006. (1 mark)
Subsidies 50
(b) Suppose the GDP of Country X in 2011 and that in 2006 are the same. Find out the value of A. (2 marks)
Depreciation 250
(a) In the above table, which approach is used to measure GDP? (1 mark) (c) (i) Calculate the growth rate of per capita GDP of Country X during the period of 2006 and 2011. (3 marks)

(b) Explain why the component ‘changes in inventories’ can be negative in value.(2 marks) (ii) Suggest TWO reasons to explain why the per capita GDP cannot accurately reflect the general living

(c) Find the value of X if the GDP at factor cost was $1,800 million. (2 marks) standard of Country X. (4 marks)

(d) Carmen is a resident of Country A. Explain whether each of the following expenditures of Carmen in the year
will be included in the calculation of Country A’s GDP. If yes, which component of GDP does it belong? 11. Suppose Sing-Kong Trade is a trading company in Hong Kong opened by a Singaporean. The company has

(i) the $5,000 housekeeping money paid to her mother (2 marks) operated in Hong Kong for 5 years and its headquarters is located in Singapore.

(ii) expense on the hair colouring service in a salon (3 marks) (a) Explain, whether the following are included in Hong Kong’s GDP and GNP:
(i) the salary earned by a Hong Kong resident who works as a storekeeper in Sing-Kong Trade. (4 marks)

8. Macy is a Hong Kong resident. In 2019, she worked in a company in France as a fashion designer on a six-month (ii) the salary earned by a Singaporean who works as a consultant in Sing-Kong Trade on a six-month contract

contract and she earned $200,000. She bought a brand new locally-produced handbag for $50,000 in Hong Kong (4 marks)

when she returned to Hong Kong. Explain how Macy would affect Hong Kong’s (b) Suppose Sing-Kong Trade pays their storekeepers on time rate.

(a) GDP. (2 marks) (i) From the viewpoint of the storekeepers, explain ONE advantage of time rate over piece rate. (2 marks)

(b) GNI. (3 marks) (ii) From the viewpoint of the employer, explain ONE disadvantage of time rate over piece rate. (2 marks)

9. Read the following economic data of Country X of a certain year. 12. Explain whether the problem of double counting in GDP calculation can be avoided by using
Components $ billion (a) the expenditure approach. (3 marks)
Private consumption expenditure 30 (b) the value added approach. (3 marks)
Gross domestic fixed capital formation 28
Changes in inventories -4
Depreciation 5 13. The following shows the trends of nominal GDP and real GDP of Country A.
Government consumption expenditure 25 ($)
Total exports of goods 50
Re-exports of goods 15
Total imports of goods 46
Total exports of services 45
Total imports of services 48
Real GDP
Factor income from abroad 20
Factor income paid abroad 16 Nominal GDP
Direct taxes 9
Indirect taxes 10
Subsidies 6 Year
0
(a) What is the difference between gross domestic product and gross national product? (1 mark) (a) Explain during the above period,
(b) Calculate the GDP and GNP at market prices of Country X. (4 marks) (i) the change of real output of Country A. (2 marks)
(c) Explain respectively whether the following items should be included in Country X’s GDP and GNP. (ii) the change of the price level of Country A. (3 marks)
(i) the salary earned by a resident of Country X from working in Country Y on a 6-month contract (4 marks) (b) During the period, statutory holidays that people enjoy increased from 10 days to 20 days. Do you think the
(ii) the salary earned by a resident of Country Y from working in Country X on a 6-month contract (4 marks) data of real GDP would understate or overstate the living standard of people in Country A? Explain. (3 marks)
(c) State TWO ways of using Country A’s GDP statistics. (2 marks)
 resident producing units of Country C. This is regarded as an import of services and should be deducted
1. (a) GDP is the total market value of final goods and services produced by all resident producing units of a from Country C’s GDP. (2 marks)
country or an economic territory in a given period, irrespective of the nationality of the producers.(2 marks)
(b) The contribution of John’s factory from producing these chairs would be less than $30,000. (1 4. (a) Hong Kong’s GDP for 2009 would increase. (1 mark)
mark) The expenditure on the construction works of the West Island Line in 2009 would be included in the GDP for
As the production of chairs requires other inputs, such as raw materials, the contribution of John’s factory to 2009. (1 mark)
the GDP should be the difference between the market value of the chairs and the value of the inputs used by (b) (i) The extension would make travelling between the Western District and other areas in Hong Kong more
the factory. As the value of the inputs was greater than zero, the contribution of John’s factory would be less convenient. This would increase the demand for flats in the district. (1 mark)
than $30,000. (2 marks) Given the supply, an increase in demand (from D0 to D1) would lead to an increase in the price of the flats
(c) (i) The gross investment in 2008 would not be affected. (1 mark) from P0 to P1. (1 mark)
As the destroyed chairs had been sold, the level of inventory would not be affected. (2 marks) Unit price

(ii) The compensation would not be included in the calculation of the GDP. (1 mark) S
The compensation was a transfer of wealth. It did not involve any production. (2 marks)
P1
2. (a) (i)By the expenditure approach, the contribution of the above production chain to Country B’s GDP
P0
= $(300 + 500 + 400) – $200 (1 mark) D1

= $1,000 (2 marks) D0
(ii) By the value added approach, the contribution of the above production chain to Country B’s GDP 0 Q0 Quantity (2 marks)
= $(300 + 400 – 200) + $(200 + 300 – 300) + $(300 – 200) + $(500 – 300) (1 mark) (ii) It would not be included in the GDP for 2008. (1 mark)
= $1,000 (2 marks) The flat was not built in 2008. The increase in the price was a capital gain and does not involve any
(b) (i) GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies(2 marks) production. (2 marks)
(ii) Country B’s GDP at market prices will not be affected. (1 mark) (iii) It would be included in the GDP for 2008. (1 mark)
Country B’s GDP at factor cost will increase by $70. (1 mark) This is because it reflects the value of services provided by the real estate agent in 2008. (2 marks)
(c) I would issue shares because the company will have no obligation to pay a dividend to shareholders even
3. (a) The GDP at factor cost of Country C for 2009 when it makes profit. It can enjoy greater flexibility in retaining its profit for future development. (2 marks)
= Private consumption expenditure + Gross investment + Government consumption expenditure + Net OR
exports – Indirect taxes + Subsidies I would issue bonds because the existing shareholders’ power of control over the company will not be
= $(80 + 70 + 30 + 60 + 10 – 5 + 3) billion (1 mark) = diluted. (2 marks)
$248 billion (1 mark)
5. (a) Country A’s GDP at factor cost in 2012
(b) (i) The trip is not a free good. (1 mark) = Country A’s GDP at market prices in 2012 – Indirect taxes + Subsidies
The quantity of trips available is not sufficient to satisfy all human wants and more trips are preferred. = $(440 – 12 + 16) million
(2 marks) = $444 million (2 marks)
OR (b) Country A’s GDP at market prices in 2012
Provision of it requires the use of scarce resources that have alternative uses. (2 marks) = Private consumption expenditure + Gross investment + Government consumption expenditure + Net
(ii) The amount should not be included in Country C’s GDP. (1 mark) exports
This is because this is only a transfer of wealth and does not involve any production. 440 = X + (80 + 10 + 20) + 120 + 100
(2 marks) X = 110 (2 marks)
(iii) It will affect Country C’s GDP. (1 mark) (c) “Changes in inventories” (1 mark)
This is because the money was spent on goods that were produced by another country instead of the Changes in inventories refer to the difference between the value of production and sales. When the value of
 sales is greater than the value of production, there is a decrease in inventories, and the item “changes in This is because it is a consumption expenditure of Carmen on currently produced final goods and
inventories” is negative. (2 marks) services. (1 mark)
OR It belongs to private consumption expenditure. (1 mark)
“Net exports” (1 mark)
Net exports of goods and services refer to the difference between the value of total exports and the value of 8. (a) As the $50,000 spent on buying the handbag is regarded as consumption expenditure by Macy on final
total imports of goods and services. When the value of total imports of goods and services is greater than goods and services, Hong Hong’s GDP would increase (by $50,000). (2 marks)
the value of total exports of goods and services, net exports is negative. (b) Hong Kong’s GNI would increase (by $250,000). Change in GNI = Change in GDP (+$50,000) + Change in net
(2 marks) factor income from abroad (+$200,000). As Macy is a Hong Kong resident, the $200,000 she earned would
(d) (i) No. (1 mark) be counted as factor income earned by residents outside the economic territory and therefore would be a
The value of shares should not be included because the transaction only represents a transfer of wealth. positive item in the calculation of GNI. (3 marks)
There is no production involved. (2 marks)
(ii) Yes. (1 mark) 9. (a) The difference between GDP and GNP is the net factor income from abroad.(1 mark)
The money reflects the value of the consulting service provided by the financial consultant in the current (b) Country X’s GDP at market prices
period. (2 marks) = C + I + G + NX
= $[30 + (28 – 4) + 25 + (50 – 46 + 45 – 48)] billion = $80 billion (2 marks)
6. (a) The contribution of the production chain to the GDP of economy A Country X’s GNP at market prices
= $10,000 – $(200 + 500) (1 mark) = $(80 + 20 – 16) billion = $84 billion (2 marks)
= $9,300 (2 marks)
(b) The contribution of the supermarket to the GDP of economy A (c) (i) It should not be included in Country X’s GDP. The resident was not employed by a resident producing unit
= $(10,000 – 2,000 – 2,500) (1 mark) of Country X. (2 marks)
= $5,500 (2 marks) It should be included in Country X’s GNP. The salary was regarded as factor income earned by residents
(c) (i) Monopoly. (1 mark) outside the economic territory. (2 marks)
(ii) Features of monopoly: (ii) It should be included in Country X’s GDP. The resident was employed by a resident producing unit of
- Single seller Country X. (2 marks)
No close substitute It should not be included in Country X’s GNP. The salary was regarded as factor income earned by non-
Barriers to entry residents within the economic territory. (2 marks)
Imperfect information
Price searcher 10. (a) GNP of Country X in 2006
Non-price competition = $45,000 million + $8,000 million = $53,000 million (1 mark)
- any reasonable answer(s) (b) GNP of Country X in 2006 = GNP of Country X in 2011 = $53,000 million
7. (a) Expenditure approach. (1 mark) $53,000 = $58,000 + A
(b) Changes in inventories refer to the difference between the total values of inventories at the beginning and A = -$5,000 (2 marks)
the end of a given period. When the total value of inventories at the end of a given period is smaller than (c) (i) Per capita GDP of Country X in 2006
that at the beginning of the same period, the value of changes in inventories is negative. (2 marks) = $45,000 million / 15 million = $3,000 (1 mark)
(c) $1,800 million = $750 million + $500 million + $(X 50) million + $100 million – $15 million + $50 million Per capita GDP of Country X in 2011
(1 mark) = $58,000 million / 16 million = $3,625 (1 mark)
X = 465 (1 mark) Growth rate of per capita GDP = $(3,625 – 3,000) / $3,000 ´ 100% = 20.83%(1 mark)
(d) (i) No. (1 mark) (ii) - Income distribution: With unequal distribution of income, even if GDP is high, a small group of rich
This is because it does not involve any production. (1 mark) people may consume very expensive goods while a large group of poor people may consume cheap
(ii) Yes. (1 mark) goods.
 - Composition of output: The higher the proportion of consumption expenditure constitutes to GDP, the (c) Uses of GDP statistics:
higher the current living standard. - reflection of people’s living standard
- Leisure time: More leisure time raises the living standard of people, but the calculation of GDP does not - assessing the economic performance of an economy
take leisure time into account because it is not transacted in the market. - formulation of government policies
- Non-market activities: Although unpaid and voluntary services raise the living standard of people, they - basis for international comparison
are not included in the GDP calculation because they are not transacted in the market. - any reasonable answers
- Environmental quality: The undesirable effects of production adversely affect the environment and
lower the living standard of people in the economy, but they are not reflected in GDP statistics.

11. (a) (i)The storekeeper is employed by a resident producing unit of Hong Kong, and his salary is included in
Hong Kong’s GDP. (2 marks)
The storekeeper is a resident of Hong Kong, and his salary is included in Hong Kong’s GNP.
(2 marks)
(ii) The Singaporean is employed by a resident producing unit of Hong Kong, and his salary is included in
Hong Kong’s GDP. (2 marks)
The Singaporean is not a resident of Hong Kong, his salary is regarded as factor income earned by non-
residents within the economic territory and is not included in Hong Kong’s GNP. (2 marks)

(b) (i)- The storekeepers can earn a more stable income.

- Any reasonable answer
(ii)- Since the storekeepers’ incomes do not directly depend on output, they tend to be less hard-
working and have less incentive to work hard.
- Cost of supervising the storekeepers’ performance is higher because of the problem of shirking.
- Any reasonable answer

12. (a)The expenditure approach measures the total expenditure on final goods and services only. The market
value of intermediate products is not individually counted. The problem of double counting can thus be
avoided. (3 marks)
(b) Under the value added approach, GDP is equal to the sum of value added of all economic activities. To
obtain the value added of a stage of production, the value of the intermediate products has to be deducted
from the gross value of output. The problem of double counting can thus be avoided. (3 marks)

13. (a) (i)As real GDP kept increasing, the real output of Country A during the above period increased.
(2 marks)
(ii) Nominal GDP is affected by changes of real output and the price level. As real output increased and
nominal GDP decreased during the above period, the price level of Country A decreased. (3 marks)
(b) People in Country A enjoyed more leisure time. This would raise people’s living standard but this was not
reflected in the GDP statistics. Therefore, the country’s real GDP would understate the living standard of its
people. (3 marks)