CCCH9007 China in the Global Economy
GDP and Economic Growth Model
Jing Li
Faculty of Business and Economics
University of Hong Kong
March 5, 2025
Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Overview
Understanding Macroeconomics
Gross Domestic Product (GDP)
Economic Growth
Jing Li March 5, 2025 1/48
Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Overview of Macroeconomics
Macroeconomics
Macroeconomics: is the study of the behaviors of the
economy as a whole.
Origin from the understanding the economic mechanism
that affected the Great Depression in 1930s.
Examine the forces that affect firms, consumers, and
workers in the aggregated level, which is different with
microeconomics, studying individual behaviors in
economics.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Overview of Macroeconomics
Objectives of Macroeconomic Policy:
Output
High and growing level of national output (GDP)
Employment
High level of employment with low involuntary
unemployment (Employment rate, Unemployment rate)
Price
A stable or gently rising price level (CPI, Inflation,
Deflation)
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Overview of Macroeconomics
Instruments of Macroeconomic Policy:
Monetary policy
Interest rate, regulating financial institutions, thereby
affects spending factors (e.g. business investment,
housing, foreign trade) and credit conditions.
Fiscal policy
Government expenditure: including government
purchase and transfer payment
Taxation: using taxes to affect individual’s disposable
income, price of goods and factors, as well as the related
incentive and behaviors
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Gross Domestic Product
(GDP)
⇑
The most comprehensive measure of a nation’s total output
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
What is GDP?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
What is GDP ?
GDP is
the market value...
– using price (not just quantity) to give greater weight to goods or
service that are higher valued in the market place
...of all final...
– Intermediate goods can not be counted
– Intermediates: flour for bread, home button for iphone. But tractor for
growing soybean is not intermediates
...goods and services...
– Goods: meat, car, etc.
– Services: haircut, transportion, entertainment, med. care, etc.
...produced...
– is meant to measure production
– sales of used products or financial securities are not counted
...within a country...
– focus on the production made by labor and capital located in a country,
geography based
– otherwise it is Gross National Product (GNP), citizen based
...within a year...
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Calculation of GDP
1 Income Approach
Total income earned by each agent (input factor) in the
economy, including compensation of employees, net interest,
rental & royalty income, and profit (remaining value added
generated by the firm)
2 Output Approach
Total value of all goods and services produced in the economy
(excluding intermediates to avoid double counting)
3 Expenditure Approach
Based on an output accounting method as well. It focuses on
finding the total amount of money spent based on the
understanding that total value of all goods produced should
be equal to the total amount of money spent on these goods.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Expenditure Approach: GDP = C + I + G + (X-M)
C = Consumption
Private spending on final goods and services
Such as expense of food, rent, gasoline, tuition fee, medical
care, but not expenditure for housing
Normally the largest component of GDP
I = Investment
Private spending on PPE and housing
Concept: goods purchased currently for use in future
production
Financial products are excluded
G = Government Spending
Includes government consumption and government investment
Excludes government’s transfer payment, such as social
security or unemployment benefit
X-M = Net Exports (NX)=Export-Import
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
China’s GDP by Expenditure
1960-2022
Source: Macromicro
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Real GDP Growth per Capita
-the best reflection of changing living standards...
Growth rate
How rapidly the country’s production is rising or falling over
time
−GDP2023
GDP Growth Rate for 2024 = GDP2024GDP2023 ∗ 100
Real vs. Nominal
–Nominal GDP is calculated using prices at the time of sale
–If want to compare GDP over time, we should always compare
real GDP, using the same price in all years for calculation
(remove the impact of price changes)
Per Capita
To remove the impact of population growth
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Beyond GDP 1:
Does GDP Measure the Success of Economy?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
GDP = Happiness?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Should and should not be included?
Some waste is counted
- A unused water dam or mega shopping mall
Does not count nonmarket activities:
- Household activities;
- Many aspects of the life quality: happiness, leisure,
safety
Omitted the bads along with production
- Environmental damage: only add in the value of
production, but not subtract the damage with production
- Social issues like wealth gap and issues related
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Beyond GDP 2:
How Much Should We Trust?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Was China’s Reported GDP Manipulated ?
Source: Chen, Chen, Hsieh, and Song (2019)
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
Why Over Report the Number?
Incentives:
Official promotion is based on local economic
performance. A Forensic Estimation of China’s National Account
(Chen, etc., 2019)
Local officials are rewarded for meeting growth and
investment [Link] Mandarin Model of Growth (Xiong,
2019)
Some ”Preparation”
China’s national accounts are primarily based on data
collected and reported by local officials
Government bureaucracy: regional government has power
to influence regional statistics for economics
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
GDP
How GDP is Over Reported
A Forensic Estimation of China’s National Account (Chen, etc., 2019)
The sum of local GDP frequently exceeds national GDP
Little discrepancy is founded between local and national
consumption
Large discrepancies is observed between local and
national statistics of investment and net export
Although central government has been aware of this issue
and found ways to adjust the numbers reported by local
government, the adjusted number were roughly accurate
until 2008, but no longer true since 2009
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Economic Growth
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Fact 1: GDP per Capita Varies Enormously among Nations
Source: Penn World Tables, 8.0. PPP adjusted.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Fact 2: Everyone Used to Be Poor
Source: Maddison, Angus. 2007. Contours of the World Economy: 1-2030 AD. Oxford: Oxford University Press.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Fact 2: Everyone Used to Be Poor
But don’t underestimate the power of small growth rate
Source: Maddison, Angus. 2007. Contours of the World Economy: 1-2030 AD. Oxford: Oxford University Press.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Fact 3: Poor Nations can Grow Much Faster than Advanced
Nations
Source: Maddison, Angus. 2007. Contours of the World Economy: 1-2030 AD. Oxford: Oxford University Press.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Fact 4: Not Always Happy Stories: Growth Miracles and
Growth Disasters
Source: Maddison, Angus. 2007. Contours of the World Economy: 1-2030 AD. Oxford: Oxford University Press.
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
How Does the Wealth of A Nation Grow?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Major Factors Behind the Wealth of Nations
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Growth Model:
Developed in the
mid-1950s by Robert M.
Solow (MIT) to
understand why GDP
varies so much across
countries
Offers an explanation for
how countries grow over
time, and why countries
might vary in per capita
GDP
Basis for his Nobel Prize
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Assumptions of Solow Model
Perfect competition
Production function follows:
Yt = AKtα L1−α
t
where
K is physical capital, e.g. machines, tools
L is labor
A is ideas (technology)
Investment is equal to constant savings from total output
It = sYt
It = Y − Ct
Capital for tomorrow is determined by investment less constant
depreciation d
Kt +1 = Kt + It − dKt
∆Kt +1 = It − dKt
Population grows at constant rate, n, set to 0 initially
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
Assume A and L is fixed for simplicity
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
add investment, I=sY
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
add depreciation, D=dK
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
∆K = I − dK = sY − dK
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
∆K = I − dK = sY − dK
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
∆K = I − dK = sY − dK
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
∆K = I − dK = sY − dK
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Model
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
The Steady State
Whatever their initial K, countries move towards steady
state
GDP growth varies with K
- if ∆K > 0, ∆Y > 0
- if ∆K < 0, ∆Y < 0
- if ∆K = 0, ∆Y = 0, GDP growth is zero at steady state
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 1: What if Investment Rate ⇑?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 2: Poor Nations will Catch Up?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 2: Poor Nations will Catch Up?
Poor countries grow faster, and they eventually catch up
to the rich countries
Think: does it hold all the time?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 2: Poor Nations will Catch Up?
OECD Example says Yes
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 2: Poor Nations will Catch Up?
But some other example says No
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 2: Poor Nations will Catch Up?
Poor countries grow faster, and they eventually catch up
to the rich countries
Think: does it hold all the time?
⇓
Convergence only happens among countries that are
plausibly similar—Conditional Convergence
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 3: Why US Never Arrive at Steady
State?
US has been growing for over 200 years
Maintain long time growth rate of 2%
Solow model can not explain?
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 3: Why US Never Arrive at Steady
State?
US has been growing for over 200 years
Maintain long time growth rate of 2%
Solow model can not explain?
⇓
Better Ideas Drive Long-Run Economic Growth (A)
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 3: Why US Never Arrive at Steady State?
Increase in A
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Economic Growth
Solow Implication 3: Why US Never Arrive at Steady State?
Increase in A
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Overview
Understanding Macroeconomics
Gross Domestic Product
Economic Growth
Thank You!
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