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Three Approaches in calculating GDP

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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 ... – PowerPoint PPT presentation

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Title: Three Approaches in calculating GDP


1
Three Approaches in calculating GDP
2
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

3
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

4
Main points
  • Expenditure on final goods and services
  • Expenditure on imports needed to be deducted from
    the calculation

5
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
  • expenditure on illegal goods/services
  • Ans Exclude. No official record

6
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

7
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.

8
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

9
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)

10
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)

11
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)

12
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

13
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

14
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

15
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

16
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.

17
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?

18
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, valued-added method is
    used.

19
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

20
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.

21
Income included or excluded?
  • Scholarships to students
  • Commission received by stock brokers
  • Insurance compensation to injured workers
  • Gift cheque to a bride

22
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

23
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

24
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

25
GDP at factor cost
  • GDP at factor cost (total value-added)
  • GDP at market price
  • indirect business tax (IBT)
  • Subsidies (S)

26
Three formula
  • GDP at market priceCIG(X-M)
  • GDP at factor costsum of value added
  • GDP at factor cost
  • wagerentinterestgross profitsdepreciation
  • GDP at factor cost indirect business taxes
    subsidies
  • GDP at market price

27
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.

28
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

29
Gross National Product
  • 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

30
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

31
Based on TB P.33 Table 2.3
  • 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?

32
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?

33
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?

34
GDP at market price
  • Nominal GDP
  • Money GDP
  • GDP at current market price

35
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

36
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.

37
Implicit GDP deflator
  • If the index is greater than 100, it means that
    there is inflation compared with the base year.

38
Money GDP growth rate
  • Money GDP growth rate

39
Inflation rate

40
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

41
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.

42
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
  • gt 2001 market price gt 1990 market price

43
TB P.33 table 2
  • From 99 to 01, did the output in HK increase?
  • Yes. As 01 real gt 00 real gt 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

44
TB P.33 table 2
  • Compare 00 and 01 real GDP, 01gt00
  • 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
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