Gross Domestic Product

Introduction

Gross Domestic Product (GDP) is one of the important economic indicators compiled by
many countries/territories for reflecting their overall economic situation.

Statistics on GDP for the HKSAR is compiled in accordance with international standards
as stipulated in the 1993 System of National Accounts published by the United Nations.

Basic Concept

GDP is a measure of the total value of production of all resident producing units of
an economy in a specific period, say a calendar year or a quarter, before deducting
B = A + C + D,
allowance for consumption of fixed capital.
B-A =C+D
GDP may be compiled by using three approaches, the "production approach", the = "Value added"
"income approach" and the "expenditure approach". These approaches also represent
how components within the GDP can be viewed from different perspectives. In theory, Value added of a certain producing unit
there is only one GDP figure. However, the data sources used in the different approaches
= Gross output - Intermediate consumption
are not the same. Therefore, some statistical discrepancy may exist among the GDP
= (B) - (A); and
estimates made under the different approaches.

GDP is the aggregate of value added of all producing units.

Production Approach
Under the production approach, GDP is the sum of "value added" of resident producing
units (e.g. factories, shops, service organizations) of a country or territory. As
illustrated in Chart 1:
In brief, value added is derived as gross output less intermediate consumption, i.e.
deducting the value of goods and services (e.g. purchase of materials and supplies, rental,
business services) used in production from the value of gross output. The above is a
relatively simplified description. The modes of operation of different industries differ.
Thus even how values of goods and services are counted may differ from one industry to
another.

It should be noted that government and non-profit institutions are also regarded as
producing units. They produce final services (e.g. social, medical and educational
services) for collective consumption by the community. The values of goods and services Gross Domestic Product in the first quarter of 2007
produced are compiled based on the input costs (including salary payment to staff and
other operating costs).
Gross Domestic Product (GDP) Previous Current
Viewing GDP from the production approach, we can study the relative shares of
different economic activities (manufacturing, construction, distributive trade, business In the first quarter of 2007, the Gross Domestic 4th Qtr 2006 1st Qtr 2007
services, etc.) in the GDP. Product (GDP) increased by 5.6% in real terms over
a year earlier, compared with the 7.3% growth in the +7.3% +5.6%
Economic Activity 1995 2000 2003 2005 fourth quarter of 2006.
Manufacturing 7.7 5.4 3.7 3.4 year-on-year year-on-year
Construction 5.1 4.9 3.7 2.9 % change % change
Services 84.7 86.6 89.3 90.7 in real terms in real terms
Others 2.5 3 3.3 3.1
GDP at factor cost 100.0 100.0 100.0 100.0

Source: National Income Section, Census and Statistics Department

Last revision date: 18 May 2007

GDP at current prices (HK$ billion)

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95

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Year
GDP at Current Prices and at Constant Prices
Estimates of GDP at both current and constant prices are compiled.
Since prices of goods and services change from year to year, the GDP valued at current
prices for different years are not exactly comparable with each other in terms of volume.
To remove the price change element, current price estimates are converted to "constant
price" estimates. In the constant price series, the effects of price changes have been
eliminated and changes in "GDP at constant prices" reflect changes in volume of
production (also referred to as changes in real terms) from one period to another.
The year-on-year change in the constant price estimates of the GDP gives a measure
of the "real" growth of the economy. To compile the constant price GDP, a "base year"
is chosen, and relevant price indices are compiled for the different components of the
GDP in different years. Each component is then revalued at base year prices by dividing
the current price value by the price index. The "constant price" GDP is then
reconstructed by summing up the "deflated" components.
Deflators Used in Compiling the Constant Price GDP
The Process of "Deflation" and Deflators
In general, constant price measure is obtained by dividing the current price value by an
appropriate price index. The compilation process whereby the effect of price change is
removed from the current value is known as "deflation", and the price index employed for
such purpose is referred as "deflator".
In compiling the constant price GDP, deflation of individual expenditure components is
carried out at a detailed level. A brief outline is given below.
The coverage of household consumption expenditure in the GDP by expenditure
approach is largely similar to that of the Consumer Price Index (CPI). The CPI and its
component indices provide the relevant deflators for consumption expenditure on
different types of goods and services in the domestic market. Deflation is carried out at
detailed commodity / service level.
Current price government consumption expenditure components are deflated by specially
constructed price indices including the salary rate index for government employees and
price indices for government purchases and sales of goods and services.
As regards machinery and equipment which are mainly imported, the unit value index on
capital goods compiled from external merchandise trade data is used as the deflator.
Constant price estimates for expenditure on building and construction are obtained by
deflating the current values by construction output deflators. These are compiled based
on tender price indices constructed for government buildings and private sector buildings
which encompass input cost elements, overheads and profit margin in construction
output.
For imports and exports of goods, constant price estimates are calculated by deflating the
current values by the respective unit value indices, compiled from external merchandise
trade data. Specific type of deflators is developed for imports and exports of services.
These include tourist price index, freight rates in respect of transportation, and other
related price indices.
Use of GDP
(1) Ratio to GDP
The level of GDP at current prices is often used as a dominator for comparison with other
variables in order to provide an indication of their relative economic significance. For
example, government spending as a percentage of GDP reflects the relative size of the
government. The ratio of total exports of goods and services to GDP provides an
indication of the degree of “openness” of an economy.
(2) GDP Deflator and CPI
GDP deflator is obtained by dividing the current price GDP estimates by the
corresponding constant price GDP estimates and then multiplying by 100. The rate of
change of GDP deflator is sometimes used as a broad measure of overall inflation in the
economy.
Both the GDP deflator and CPI are commonly used as measures of inflation (i.e. increase
in price levels) by data users. However, the movement of the GDP deflator may differ
from that of the CPI as the latter only measures price changes encompassing goods and
services purchased by households.
A commonly asked question is that if both the GDP deflator and the CPI are "indicators
of inflation", why do we often observe different rates of change in these indices?
The answer to the question is illustrated as follows by way of the identity used for
compiling GDP:
GDP = C + G + I + X - M ..... (*)
GDP deflator and CPI measure changes in prices under different contexts. The former is
affected by price changes for the entire economy (GDP) while the latter measures price
changes relating to household consumption (C).
References:
Understanding the concept of Gross Domestic Product and Gross National Product.
HKSAR: The Census and Statistics Department
Hong Kong Census and Statistics Department Website: “www.censtatd.gov.hk”
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Optional: Additional Information (Two other approaches to calculate GDP)
Income Approach
Under this approach, GDP is calculated as the sum of incomes for the factors of
production (labour, capital and entrepreneurship) distributed by the resident producing
units in a country or territory, as rewards to their production of goods and provision of
services. Factor incomes include "compensation of employees" (comprising wages,
salaries and other employee benefits) and "gross operating surplus" of enterprises.
In Chart 1, it is shown that the value added of a producing unit is also equal to the sum of
its compensation of employees (C) and gross operating surplus (D). Viewed from this
angle, or the income approach, GDP, being the value added of all producing units, is thus
equal to the sum of the compensation of employees at the economy-wide level and the
gross operating surplus of all resident producers.
Analysing GDP from the income approach, we can study the relative shares of
compensation of employees (CE) and gross operating surplus (GOS) of enterprises.
The corresponding figures for 2003 are 55.6% for CE and 44.4% for GOS for the
economy as a whole. The ratio of CE to GOS would vary among different economic
activities.
Expenditure Approach
Under the expenditure approach, we work backwards from the goods and services
available for use and trace the domestic contributions in creating the goods and services.
We first add up the values of goods and services put to final use. Final expenditures on
such goods and services are classified into the following categories:
(a) Private consumption expenditure (C),
(b) Government consumption expenditure (G),
(c) Gross domestic capital formation (I),
(d) Exports of goods (Xg) and Exports of services (Xs), making up Exports (X).
Having got the total (C + G + I + X), which is the total final demand, we then remove
the import contents from it by deducting the value of imports (M), which comprises
imports of goods (Mg) and imports of services (Ms).
Hence GDP = C + G + I + X - M. We note here that each of the components C, G, I and
X has import contents (both direct and indirect import contents) but it is not possible to
remove such. The import contents are removed collectively by the subtraction of M.
It should be noted that the GDP by expenditure approach is compiled based on goods and
services for final use. Goods and services used as intermediate input for production
should not be included, otherwise there will be double-counting.