F.

5 Economics Notes

Chapter 1 Measurement of economic performance (I) GDP and GNP

1.1 Basic concepts of gross domestic product (GDP)?

& services ( KPU )
A. Gross domestic product (GDP) final goods
production resident
GDP is the total value of ___________________ of all ___________________________
producing
units of an economy in a specified period.(e.g.__________________________ )
quarter / year
a a

*
B. Resident producing units (RPU)
RPU of an economy are production units (individuals or organizations) which maintain a
-

_________________
centre ecotone Hest
of predominant ___________________________ in the economy.
If a producing unit is an individual, he/ she is regarded as an RPU if he/ she has remained
12 months
in the economy for at least _____________________or intends to do so, regardless of his/
her nationality. ,

Test yourself 1.1: Are the following regarded as RPU of HK?

Producing unit or
not?
Has HK residence
status?
-
-
€
a The Bank of East Asia (China)
Ltd in the mainland Yes .

No .

-ᵗʰ
b A British manager of the BEA in
HK who has signed a one-year No -
No .

contract
C A self-employed delivery driver
in HK
Yes Yes .

-
C. Items not included in GDP *

1. Items not involving production

tr
a. Transfer payment g
i. Example of transfer payment includes Comprehensive Social Security Assistance.
ii. Transfer payments are not counted in GDP because they are _________________________ '
*
_____________________________.
NOT
production production Involved
payments for i.e. no

,%; ¥
.

→
b. Capital gain e- s .

$2m
,

i. Example of capital gain includes in the market value of an asset.

ii. It is not included in GDP as it __________________________________________________
Ts not
generated from production -

___________________________. g- the value of property rues

e. a , .

the increment ( capital gain ] Is not

counted GDP in .

c. Financial assets
i. Examples: Purchase of ______________,
shares ____________________
bonds and deposits
ii. They are not counted in GDP as they involve no current production. * =

d. Second-hand goods
i. They are not counted in GDP as they involve no current production.
-

2. Items not produced by resident producing units

a. __________________
Imported goods and services are produced by foreign producing units, not
_

produced by _______________________________
resident producing units of the economy.
b. Their values should______________
not be counted in the GDP of the economy.

1
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3. Items not produced in specified period the
year
counted for
GDP .

a. Past inventories 4-3-41

Past inventories
i. ___________________________are produced in the past, not in the current period.
ii. They are not included in GDP as they do not-0
involve current production.

4. Items not counted statistically

According to international statistical standards, GDP excludes the value of all ____________
unpaid
services produced by ___________________
households for self-consumption and the value of volunteer
services offered to ____________________ making institutions.
non -

profit
5. Unreported or non-marketed production
a. The value of ____________________,
illegal ____________________
unreported or non-marketed
production are ____________________
estimated and included in GDP. _

b. For example: smuggling and piracy, private tutors and hawkers, production of
agricultural products for self-consumption

→
1.2 Three approaches to measuring GDP

1. Production approach
2. Expenditure approach in DSE
required
'

3. Income approach d- not

Theoretically, GDP obtained by the three approaches are equal.

( )
GDP
( by expenditure approach> (by Production approach) approach ) ( by income

Total expenditure ______ Total market value of production _____ Total factor income
=

1.3 Production Approach

value added
a. The production approach is also called the ________________________ approach. -

b. It measured GDP by calculating the total value of production (or value added) of all RPU
in all industries during the specified period.
-

- -

A. What is value-added?
value '- added of
a. The values-added of a producing unit refers to the _____________________
production.
b. It is different from the ______________
value of output. This is because a producing unit
usually buys ________________________
intermediate products from other producing units.
Tnputs/

Value-added = Value of output Value of intermediate consumption

= ( inputs ]
= ( cost ]

2
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 B. Compilation of GDP by production approach

1. Adding up the _______________________

value added -
of all resident producing units
-

2. Adding indirect taxes and __________________ subsidies

factor cost
3. The total value-added is also called GDP at _________________ which is different
from GDP at market prices. GDPFc

4. Governments may ________________ the production of some products. These

subsidies ______________ market prices to a level _______________ factor costs.
9- Sales tax
( Indirect )
e-
business tax

☆5.

}
GDP at market prices = GDP at factor cost + Indirect taxes Subsidies

6
GDP Mp ( IBT
GDPFC + Sub )
= -

GDP at IBT
GDP at factor cost = price
+ sub
-

market

1.4 Expenditure approach

~
GDP is measured by the total _____________________on final products produced by all resident
expenditure
producing units in a specified period.

Final products have to be identified before the calculation of GDP.

=

(
A. Identification of final products) and(intermediate products) )
final use Cconsampti
a. Final products are goods and services for __________________________.
b. Intermediate products are ___________
goods used up to produce goods and services for sale.
not
c. The expenditure on intermediate products should _____________ be counted in order
to avoid ________________________
double the values of the final products.
counting
B. Compilation of GDP

GDP obtained by the expenditure approach is also called GDP at __________________

market prices.

GDP = C+I+G+X-M '

O
= C+I+G+NX (where NX [net exports] = X-M)
r

C. Expenditure components
There are five expenditure components in the expenditure approach.

3
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Double counting

rÉ
÷
¥
 HEFFLEY 'ÉI A -9 GDP

GDP market price

at
C -
= + I +
G c- ✗ -

M .

↑ ↑ ↑
\
/
( by expenditure approach ) .

4 sectors of an economy _

}
'
s Households

to Firms

Government
.

3,

4) International .

market / parties
 's
" non
-

government
±
1. Private consumption expenditure (C)

of @
final products by:
consumption
Private consumption expenditure refers to overall expenditure on the _______________

households
*a. domestic _________________________ ;
b. private _________________
non-profit making institutions serving households
Note: cat
a. H _____________
renting premises is counted because the
⊖rentals are payments for residential services in the _______________
current year.
④ b. The market rental value of ______________________premises
owner-occupied
because the owners consume residential services provided by their
is=
counted

___________
own premises in the current year.
_

c. The market rentals are _______________

estimated and _______________
counted in GDP as if
the owners are paying __________________________
market rent @ to themselves.

Éj
2. Gross Investment Expenditure (I)
Gross investment expenditure
final
o Gross investment expenditure refers to the ________________ expenditure of
________________
domestic firms (including private and public enterprises) on final
products.
o This is also called________________________________________________
domestic capital frm :*" .
o It can decomposed into gross fixed investment expenditure and
11

TnuentoruÉf*ed
_______________________________.
changes in capital formation

a. Gross ☐ fixed investment expenditure can be further broken down into:

{
Cross domesti ' i. depreciation
fixed capital (also called________________________________)
capital consumption allowance
It is the expenditure on ______________________existing
maintaining capital stock.
formation ii. net fixed investment expenditure
capital formation
(also called___________________________________________)
net fixed
It is the expenditure used to ________________ their capital stock.
expand
b. changes in inventories
i. Changes in inventories refer to the change in the _________________ of
-

total value
inventories held by domestic firms.
ii. They include_________________________
raw materials , semi-finished products and
unsold finished products.

Gross investment Gross fixed Changes

expenditure (I) = investment + in inventories
expenditure

E-
Gross investment (Depreciation Net fixed Changes
expenditure (I) + in
= + investment
expenditure inventories

Gross investment (Depreciation Net investment expenditure

expenditure (I)
= +

4
F5/Economics/Notes/Ch/1/P.
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-

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< $1m
contribute
to 6%12024 ?
why I Nike 's

in 2021
e.
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2022
and sold an .

serene
in 2022
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counted as
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25 past Twenty
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2021
tri
which were produced
counted
in 2021 GDP
i. $100k →
( Increase
In Twuentoyj
£22 GDP .

not counted
an
→

"

+ ve →
increase
"

change
Tn Tnventory
① -

i -

ve
"

→
decrease

Increase
Twenty
→ + ve →
② increase
in

- ve → decrease

decrease
c-ve →

inventory
* →

③ decrease in

ve → increase
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=
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=

used to replace

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=
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-
the
depreciation
⑦
.

of assets .

"
Gross = Net c-
Depreciation
= 2
+ 2

(I ]
Gross Investment expenditure ,

formation + change inventory

= Gross domestic fixed capital ~
-
-
-

- t
/

fÑdcqise-DIin#
-

in
= Net domestic + change taunting
=

formation
3. Government Consumption expenditure (G)
Government consumption expenditure refers to overall expenditure on consumption by: I _

a. Government ____________________
department which are not engaged in market activities
(e.g. f-Tre serines Department & Education Burgan );
b. ______________________
non
profit
- quasi-government institutions
_

(e.g. the Consumer Council ).

measured at cost

•÷!
GDP
" "

≠ G GDP G
" "
in in
cut market price >
,

to
Government Gross Governtent Transfer
expenditure consumption + payments
= + investment
→
expenditure expenditure

**Only Gross consumption expenditure is counted in GDP!!

(
grant of money,
Transfer payments are government _____________________
Subventions to individuals or organisations.
current
These are __________________ transfers, not payment for _________________ production. ,
money included in GDP. " * no current
They are ___________
not Trained
consumption

4. Exports (X)
Exports refer to foreign expenditures on domestic production.
Components of exports include
1. _________________
Total exports of goods;
2. exports of__________________
services .
Exports of goods can be further decomposed into domestic exports of goods and
__________________
re export
- of goods. =

Exports = Domestic exports of goods + Re-exports of goods + Exports of services

T.tn#-s-sd
-

5. Imports (M)
Imports refer to domestic expenditures on foreign production.
Components of imports include
1. imports of________________;
Soots
2. imports of ________________________
services .

Imports = imports of goods + imports of services

Note: RPU ✗
"

o Imports are not produced by resident producing units of the economy. However, their
values have been _______________in
counted the expenditure of households, firms, the
government and the foreign sector.
o Therefore, the value of imports has to be _______________
deducted from the
final expenditures to obtain___________________.
net
export
tourists counted
'

* Foreign expenditures Tn our economy are

"
"
services
as our
export of .

* Net
exports
=
Total exports -
Total imports .

NX is + re if ✗ >M
)
µ
X M
NX
-
,

M
if
=
ve ✗<
axis -

Net
export exports ofgoods export
c-
Net
Net
=
>
= 9- services -

5
F5/Economics/Notes/Ch/1/P.
$woocfrom government
the
-

counted in
GPP ?
→ $ soooo subsidy :

n
.
No :
-
transfer payment
incurred
current production
.

-
no

how will
it affect GDP ?
→ Sterno subsidy :
 ( = Gross National Product C
Gap >]
1.5 Compilation of Gross National Income (GNI) or
Natural Income (NZ
)

A. Definitions
GNI is the total income earned by ____________________
residents of an economy from engaging in
various economic activities during a specified." This is also known as Gross National Product
(GNP). period .

The concepts of residents

at least
a. Individuals who have stayed or intend to stay in the economy for _____________ one
year;

b. Organizations which ordinarily operate in the______________________ .

economy
B. Compiling GNI from GDP

GNP and GDP may not have the _____________

same value. This is because:
a. GNI includes factor incomes earned by residents from outside the economy while GDP
- -

excludes them
b.
c. GNI excludes factor incomes earned by non-residents from within the economy while
GDP includes them.
d.

Factor income
GNI = GDP + from abroad ( Factor income
paid abroad )
Net income
= GDP + from abroad

larger than
GDP ? NO ! ! !
Is GNP CGNI ) definitely

GNI ( Garp ) =
Gop + Net Income from abroad

* "
net income from abroad
"
Ts +ve GNP >
app
If
-
ve
Gnp
<
app

C+ItG+✗-µ."°" aup=o#
C + ve

Can be + ve
Tncereese a
Twenty
I Change Tn Tmvenfoy
or -
re
decrease en
Eauenfy

depreciation
' '
' '
→ g
depreciation
"
occurs 6
" '

→ + ✓ e .
F5/Economics/Notes/Ch/1/P.
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