Download Three Approaches in calculating GDP

Three Approaches in
calculating GDP
Three Approaches
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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
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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)
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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
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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)
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Change in Stock (Inventories)
E.g.1
07 Output Value of Eason’s 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)
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Investment expenditure
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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)
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= 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)
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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?
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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
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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 Kong’s
Gross Domestic Product?
Production (Valued-added)
approach
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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.
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
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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?
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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 value-added)
= GDP at market price
– indirect business tax (IBT)
+ Subsidies (S)
Three formula:
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GDP at market price=C+I+G+(X-M)
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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
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Gross National Product
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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
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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
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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
GDP vs GNP
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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
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GDP / population size
If we compare HK’s GDP with China’s
GDP, which one is larger?
If we compare HK’s per capita GDP with
China’s 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
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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
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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
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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
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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