Download CH1-National Income Accounting-SV

CH1-National Income
Accounting
HK Certificate of Education
Examination
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
1
National Economic Objectives
Attaining full employment
Attaining economic growth
Stabilizing the general price level
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
2
National Income Accounting
By measuring national income of the
economic territory of an economy, one can
estimate how well his economy performs
in achieving its national economic
objectives.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
3
Stock Concept
A stock is any measurement at a particular
point of time.
Example: On 14th August 2004, Peter’s
total wealth was $200,000.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
4
Flow Concept
A flow is any measurement that spreads
over a certain period of time.
Example: Peter earns $8,000 as his
monthly income.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
5
Stock or Flow?
Peter earns an interest of $10 from his
$100,000 saving in HK Bank for a month.
Flow
On 31st August 2004, Welcome’s total stock
Stock
of goods in Long Ping Estate was $1 million.
A secondary school teacher earns $16,000
per month.
Flow
HK’s GDP for the year of 2003 was $20,000
Flow
billions.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
6
Intermediate Vs. Final Goods
Intermediate goods are goods and
services produced for assisting further or
other production.
Final goods are goods for final use or
consumption.
A good can be an intermediate good or a
final good, depending on how it is being
used.
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CH1-National Income Accounting-SV
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Intermediate or Final Goods?
Flour bought by Golden Apple Cake
shop.
Intermediate
Lobster cooked by mom for
celebrating your pass in Econ test.
Final
Fish steamed by the cook of a fish
stall for his workers.
Final
An ice-cream you bought from
McDonald’s.
Final
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
8
Basic Circular Flow Model
Factors of production
Factor Income
Firms
Households
Expenditure
Goods & services
Real Flow
Money Flow
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CH1-National Income Accounting-SV
9
We consider the basic circular flow of a certain
economy.
Real Flow
Goods & Services
$20
Firms
$300
$200
Total market value of all final goods
= $20 + $300 + $200
Households
= $520
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
10
We consider the basic circular flow of a certain economy.
Real Flow
Goods & Services
$20
Firms
$300
$200
Total market value of all final goods
= $20 + $300 + $200
Households
= $520
National Product or
National Output
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
11
On the other hand, we consider the households total expenditure on
these goods.
Real Flow
Money Flow
Goods & Services
$20
$20
$300
$200
$100 $100 $100
$100
$100
Firms
Households
Factors of Production
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CH1-National Income Accounting-SV
12
On the other hand, we consider the households total expenditure on
these goods.
Real Flow
Money Flow
Goods & Services
$20
$20
$300
$200
$100 $100 $100
$100
Expenditure on Final
Goods & Services
Firms
Total Expenditure on these
goods
= $20 + $300 + $200
= $520
$100
Households
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
13
On the other hand, we consider the households total expenditure on
these goods.
Real Flow
Money Flow
Goods & Services
$20
$20
$300
$200
$100 $100 $100
$100
$100
Expenditure on Final
Goods & Services
Firms
Total Expenditure on these goods
= $20 + $300 + $200
= $520
Households
National Expenditure
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
14
Those households who provide factors services in the production
would receive income from the firms.
Money Flow
Households’ total income
= $200 + $50 + $150 + $120
= $520
Expenditure on Final
Goods & Services
Firms
Households
Factor Income
Wages
Interest
Rental
Income
Profit
$200
$50
$150
$120
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
15
Those households who provide factors services in the production
would receive income from the firms.
Money Flow
Households’ total income
= $200 + $50 + $150 + $120
= $520
National Income
Expenditure on Final
Goods & Services
Firms
Households
Factor Income
Wages
Interest
Rental
Income
Profit
$200
$50
$150
$120
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
16
Real Flow
Money Flow
Goods & Services
$20
$20
$300
$200
$100 $100 $100
$100
$100
Expenditure on Final
Goods & Services
Firms
Households
Factor Income
Wages
Interest
Rental
Income
Profit
$200
$50
$150
$120
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
17
From the above analysis, we find that:
Real Flow
Money Flow
Goods & Services
The total market values
of final goods
& services
$300
$20
$20
$200
$100 $100 $100
$100
$100
Expenditure on Final
Goods & Services
The total expenditures on
Households
the final goods & services
Firms
Factor Income
Wages
Interest
Rental
Income
$200The
total
$50 income
$150
of the households
Profit
$120
Factors of Production
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
18
That is:
Real Flow
Money Flow
Goods & Services
National Product
$20
$20
$300
$200
$100 $100 $100
$100
National
Expenditure on
Final
Goods & Services
$100
Expenditure
Firms
Households
Factor Income
NationalInterest
Income Rental
Wages
Income
$200
Ex 1: TB/P.8/MCQ1
By Mr. LAU san-fat/ver 2004
$50
$150
Profit
$120
Factors of Production
CH1-National Income Accounting-SV
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National Output and …
National Output (NO) is the measure of
total market value of all final goods &
services.
National Expenditure (NE) is the measure
of total expenditure on final goods &
services.
National Income (NI) is the measure of
households’ total income.
NO ≡ NE ≡ NI
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
20
Gross Domestic Product (GDP)
Definition: GDP is an aggregate measure
of the total value of production of all
resident producing units within the
economic territory of an economy in a
specified period, usu. a quarter or a year.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
21
Resident Producing Unit (RPU)
A resident producing unit maintains her
centre of economic interests in the
economic territory of an economy.
A RPU therefore ordinarily operates in the
economic territory.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Resident Producing Unit or Not?
A factory producing toys in HK
Yes!
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
23
Resident Producing Unit or Not?
A fast food shop in HK
Yes!
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
24
Resident Producing Unit or Not?
An Citibank Corporation in HK
Yes!
An Citibank Corporation in USA
No!
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
25
Resident Producing Unit or Not?
Yes!
It depends
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Gross National Product (GNP)
Definition: GNP is a measure of 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.
GNP is identical to Gross national income
(GNI), which is a contemporary term.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Residents of an Economy
Residents maintain their center of
economic interests in an economy.
Resident individuals refer to those who
normally stay in the economic territory of
the economy for at least 12 months or
longer, or intend to do so, irrespective of
their nationality.
Resident organizations (or RPUs) refer to
those which ordinarily operate in the
economic territory.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
28
Residents or Not?
A foreign domestic helper working in HK
Yes
A branch of a foreign bank operating in
HK
Yes
A solicitor coming to HK to work on a
short-term 3-month contract for a local
company
No
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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GDP Versus GNP
GDP
Value of production
GNP
(Factor) income earned
By resident producing
unit
By residents
Factors are owned by
residents or nonresidents
Within the economic
territory
Factors are owned by
residents only
By Mr. LAU san-fat/ver 2004
Within or outside the
economic territory
CH1-National Income Accounting-SV
30
GDP Versus GNP
GDP is more relevant for analysis related
to production activities within the economy,
e.g. employment, productivity, industrial
output, investment in equipment &
structure.
GNP is useful for analyzing economic
situations relating to income of residents,
investment behavior, domestic demand &
inflation.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
31
Being Included in GDP or GNP?
Mr. Chan is now living in HK. He has a toy
factory here and earns $2 million this year.
HK’s
GDP
Mr. Chan also has a garment factory in
China and earns $1.2 million this year.
A Filipino maid in HK usually gets a longterm contract of two years. She earns
$22,000 this year.
A retired old man who is a resident of HK
and earns a rental income of $50 000 this
year from his house in Australia.
HK’s
GNP
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
HK’s
GNP
HK’s
GNP
32
From GDP to GNP
GNP = GDP + (Factor income earned by
residents from outside the
economic territory – Factor
income earned by non-residents
from within the economy)
= GDP + Net factor income from
abroad or External Factor Income
Flows
By Mr. LAU san-fat/ver 2004
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From GDP to GNP
Factor Income
= investment income + compensation of
employees
Investment income
= direct investment income(e.g. dividends) +
portfolio investment income(e.g. security
interest) + other investment income(e.g.
deposits interest)
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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From GNP to GDP
GDP = GNP – (Factor income earned by
residents from outside the
economic territory – Factor
income earned by non-residents
from within the economy)
= GNP – Net Factor Income from
Abroad or Net External Factor
Income Flows
Ex 2: TB/P.26/MCQ 6 & 7
Ex 3: TB/P.27/MCQ8
By Mr. LAU san-fat/ver 2004
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More About National Income
Statistics
GDP at factor cost = GDP at market
price – indirect business taxes + subsidies
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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More About National Income
Statistics
GDP at factor cost = GDP at market
price – indirect business taxes + subsidies
GDP at market price = GDP at factor cost
+ indirect business taxes - subsidies
GDP per capita = GDP/population size
Net Domestic Product, NDP = GDP depreciation
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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More About National Income
Statistics
Net National Product, NNP = GNP depreciation
National Income, NI = W + I + R + 
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Measuring GDP(1): The Product
or Output Approach
GDP is total market values of all final
goods and services produced by the
resident producing units of an economy
within a specified period.
Intermediate goods are excluded to avoid
the problem of double counting.
In reality, it is hard to distinguish between
final and intermediate goods.
– thus, value-added method is adopted
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By Value Added Approach
(From C.S.D.)GDP is an aggregate
measure of the total value of net output of
all resident producing units of a country or
territory in a specified period.
Net output is measured by value added
Value added = value of gross output –
value of intermediate consumption
– Intermediate consumption is the value of
goods & services used up during production.
By Mr. LAU san-fat/ver 2004
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By Value Added Approach
value added = sales revenue - input cost
By value added approach,
– GDP = summation of value added in ALL
stages of production + indirect business taxes
(IBT) – subsidies (S)
By Mr. LAU san-fat/ver 2004
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Stage 1: Growing wheat
Input cost (wheat seeds) = $0.0
Sales revenue (wheat) = $2.0
Value added
= $(2.0 - 0.0)
= $2.0
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Stage 2: Milling wheat
Input cost (wheat) = $2.0
Sales revenue (flour) = $3.5
Value added
= $(3.5 - 2.0)
= $1.5
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Stage 3: Baking bread
Input cost (flour) = $3.5
Sales revenue (bread)= $6.0
Value added
= $(6.0 - 3.5)
= $2.5
By Mr. LAU san-fat/ver 2004
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Measuring GDP:
Given:
final good: bread ($6.0)
Intermediate goods: wheat ($2.0)
flour ($3.5)
• By Output Approach,
GDP = $6.0
• By Value Added Method
GDP = $[(2.0 - 0.0) + (3.5 - 2.0)
+ (6.0 - 3.5)] = $6.0
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Items Being Excluded from GDP
Items
Reasons
Non-marketed or selfsustained products
No market value
involved
Reference: TB/P.21/Closer Look
Ex 4: TB/P.13/Q2.1
Ex 5: TB/P.18/MCQ4
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Measuring GDP(2): The
Expenditure Approach
GDP = C + I + G + (X - M)
while (C + I + G + X) = total final demand
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Measuring GDP(2): The
Expenditure Approach
on ‘C’: only expenditure on consuming
final products counted
on ‘I’: I = gross domestic fixed capital
formation + change in stocks
– gross domestic fixed capital formation =
expenditure on land, buildings & construction,
plant, machinery, equipment & related
expenses
– change in stocks = unsold goods (values of
raw materials & work-in-progress)
By Mr. LAU san-fat/ver 2004
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Measuring GDP(2): The
Expenditure Approach
net investment = gross investment –
depreciation
Ex 6: Why should the changes in inventories be included
in GDP?
•TB/P.15/Closer Look
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Measuring GDP(2): The
Expenditure Approach
on ‘G’: including payments to civil servants
& expenditure on final products while
excluding transfer payments
on ‘X-M’: net exports
= net exports of goods + net exports of services
= [domestic exports of goods + re-exports of
goods – imports of goods] + [exports of
services – imports of services]
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CH1-National Income Accounting-SV
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Why M is deducted from the
total final demand?
The value of imports has to be removed
because EACH of the components of C, G,
I & X has import contents (both direct and
indirect import contents) but it is not
possible to remove such. They are
therefore removed collectively by the
subtraction of M.
Hence, GDP = C + G + I + X - M
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
53
Items Being Excluded from GDP
Items
Reasons
Unreported transactions No data is available
Illegal transactions
No data is available
Second-handed goods
No current production
involved
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CH1-National Income Accounting-SV
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Items Being Excluded from GDP
Items
Reasons
Expenditure on stocks,
i.e. shares & bonds
Expenditure on welfare
payments
-no production involved
-a mere transfer of
ownership
No production involved
Ex 7: TB/P.11/MCQ2
EX 8: TB/P.17/Q2.2
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Measuring GDP(3): The Income
Approach
By income approach, GDP is calculated as
the sum of incomes for the factors of
production distributed by the resident
producing units in a country or territory, as
rewards to their production of goods and
provision of services.
In other words, GDP is the sum of factors
income (arising from production) provided
by the resident producing units in an
economic territory in a specified period.
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
56
Measuring GDP(3): The Income
Approach
Factor incomes = compensation of
employees (including wages, salaries &
other employee benefits) + gross
operating surplus of enterprises
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
57
Measuring GDP(3): The Income
Approach
By income approach, GDP
= compensation of employees + gross
operating surplus of enterprises +
indirect business taxes – subsidies
= W + I + R +  + depreciation allowance
+ indirect business taxes – subsidies
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Items Being Excluded from GDP
Items
Reasons
Income from gifts,
gambling & lucky draw
By Mr. LAU san-fat/ver 2004
No production involved
CH1-National Income Accounting-SV
59
Comparison of the 3 Approaches
Expenditure
Approach
X
I
= Imported contents
removed at the aggregate
level, i.e. deducting
M from (C + I + G + X)
G
C
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CH1-National Income Accounting-SV
60
Comparison of the 3 Approaches
Expenditure
Approach
X
Income
Approach
Product
Approach
gross
operating
surplus
Value added:
manufacturing
sector
I
G
Compensation
of
employees
Value added:
services
sector
Value added:
other sectors
GDP
at
factor
cost
GDP
at
market
price
C
IBT - S
By Mr. LAU san-fat/ver 2004
IBT - S
CH1-National Income Accounting-SV
61
GDP at Current Market Prices
GDP at current market prices/Money
GDP/Nominal GDP measures the market
value of final goods and services at
current market prices.
Nominal GDP = P x Q
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
62
GDP at Constant Market Prices
GDP at constant market prices/Real GDP
measures the market value of final goods
and services at the prices of a particular
chosen year called base year(with
constant general price, i.e. P =1).
Real GDP = P x Q = 1 x Q = Q = real
output (in current year)
Therefore,  Real GDP =  Real output
=  Real living standard
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
63
Nominal GDP Vs. Real GDP
As nominal GDP = P x Q
–  nominal GDP =  P x Q
or
= P x Q
or
=PxQ
Thus,  nominal GDP   real output
Thus,  nominal GDP   real living
standard
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
64
Find Real GDP: by Implicit GDP
Deflator
As (price index of the base year/price
index of the current year) = (real
GDP/money GDP) and price index of the
base year = 100
– implicit GDP deflator = (money GDP/real
GDP)x100
– thus, implicit GDP deflator = price index of the
current year
– thus, real GDP = money GDP x (100/price
index of the current year)
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CH1-National Income Accounting-SV
65
Money GDP, Prices & Real GDP
↑real GDP
If %↑money GDP > %↑P
If %↑money GDP < %↑P
P
↓real GDP
If %↑money GDP = %↑P
real GDP
If %↑money GDP & %↓P
↑real GDP
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Money GDP, Prices & Real GDP
↓real GDP
If %↓money GDP & %↑P
If %↓money GDP > %↓P
P
↓real GDP
If %↓money GDP < %↓P
↑real GDP
If %↓money GDP = %↓P
real GDP
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Money GDP, Prices & Real GDP
If %↑money GDP > %↑real GDP
↑P
If %↑money GDP < %↑real GDP
↓P
If %↑money GDP = %↑real GDP
P
If %↑money GDP & %↓real GDP
↑P
P
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
68
Money GDP, Prices & Real GDP
If %↓money GDP & %↑real GDP
↑P
If %↓money GDP > %↓real GDP
↓P
If %↓money GDP < %↓real GDP
↑P
If %↓money GDP & =%↓real GDP
P
P
Ex 9: TB/P.28/MCQ9
By Mr. LAU san-fat/ver 2004
Ex 10: TB/P.30/MCQ10
CH1-National Income Accounting-SV
69
The Growth Rate of GDP
GDP growth rate = [(GDP of current
period – GDP of last period)/GDP of last
period] x 100%
Real GDP growth rate = [(real GDP of
current period – real GDP of last
period)/real GDP of last period] x 100%
Ex 11: TB/P.31/MCQ11
Ex 12: TB/P.32/MCQ12
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CH1-National Income Accounting-SV
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Uses of National Income Statistics
as a measurement of living standard
as a basis for international comparison of
welfare or living standard
as a basis for formulating government
policies
as a basis for formulating business
decisions
as an indicator of economic progress
Ex 13: TB/P.37/MCQ13
By Mr. LAU san-fat/ver 2004
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Limitations of National Income
Statistics
nominal GDP neglects the effects of price
change
– real GDP is preferred
By Mr. LAU san-fat/ver 2004
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Limitations of National Income
Statistics
real GDP neglects the effects of
population size
– real GDP per capita is preferred
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Limitations of National Income
Statistics
real GDP per capita ignores the problem
of income distribution
– uneven distribution of income implies the
problem of widening income gap
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
74
Limitations of National Income
Statistics
real GDP per capita ignores the effects
of self-sustained products, non-marketed
goods & unreported transactions
– real GDP per capita underestimates the real
standard of living
By Mr. LAU san-fat/ver 2004
CH1-National Income Accounting-SV
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Limitations of National Income
Statistics
real GDP per capita ignores the
desirable and undesirable effects of
production
real GDP per capita neglects the effects
of composition of GDP
– larger portion of consumer goods supports a
higher present living standard while larger
portion of capital goods implies a higher
future living standard
Ex 14: TB/P.38/MCQ14
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CH1-National Income Accounting-SV
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Factors Affecting National Income
Demand-side Factors:
– consumption (C) demand
– investment (I) demand
– government expenditure (G) demand
– net exports (X-M) demand
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CH1-National Income Accounting-SV
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Factors Affecting National Income
Supply-side Factors:
– labor productivity
– amount of capital (goods)
– amount of land
– level of entrepreneurship
– level of technology
Ex 15: TB/P.39/MCQ15
Revision Ex: TB/P.43
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