Book 5 - Ch.

1: National Accounting (1)

Gross Domestic Product Textbook P.2

¨ Use to measure the of an economy.

¨ GDP is a measure of the of

goods and services produced by all

of an economy over a period of time.

***Resident producing unit refers to those, individuals or organizations, establish their centre of
economic interest in an economy over a year. Test yourself 1.1 exercise Textbook P.3

Goods or services that do not have market value are NOT counted in GDP.
E.g. Self-provided goods and services such as housework activities
EXCEPTION: rental values of owner-occupied houses or flats are estimated and included in GDP.

Consolidation
True False
1. Market value of all market transactions should be counted in GDP.

2. The transaction values of the shares in the stock market should be

included in GDP.
3. A NET teacher from United States, who is employed by a Hong Kong
School for a two-year teaching contract. Her salary should be counted in
HK’s GDP.
4. A TVB reporter who is assigned to station in Beijing for half of a year.
His contribution of work should not be counted in HK’s GDP.
5. The unsold stock value should be included in the current year’s GDP.

6. The spending on imported cars from Japan is counted in HK’s GDP.

Stock concept v.s. Flow concept

¨ In economics, a stock is any measurement in .
e.g. The value of HK’s GDP in 2021 was $2,871 billions.

¨ A flow is any measurement that spreads over .

e.g. There was an decrease in $180 billions of HK’s GDP from year 2020 to 2021.

Book 5 Ch.1 National Accounting (1) 1

The curricular flow model Textbook P.8

Expenditure on final goods & Money Flow

services
Households
Firms
Real Flow
Factor income

Ways of measuring GDP Textbook P.8-9

1. The expenditure approach

The GDP is measured as the spent on the volume of final goods
and services.

2. The output approach (value-added approach)

The GDP is measured as the created by the volume of
final goods and services.

3. The income approach

The GDP is measured as the arising from the production of the volume
of final goods and services. [Wage+Interest+reant+profit]

National Income = National Expenditure = National Output

by Bart Yip

The expenditure approach ( C+GI+G+X-M) Textbook P.14

² Measure the total spending by individuals, firms and the government expenditure on
final goods and services BUT EXCULDE the intermediate goods
For more details, reach
http://www.censtatd.gov.hk/hong_kong_statistics/statistics_by_subject/concept/national_income
/index.jsp

Book 5 Ch.1 National Accounting (1) 2

Ø Personal/Private consumption expenditure (C) Textbook P.16
¨ Includes durable and non-durable on final goods and services by
households and private non-profit institutions serving households.
¨ Exclude goods

Source: Pearson NSS Exploring Economics 5 The 2nd Edition

Illustration-1
David bought a second-hand car for $20,000. At the same time, he needed to pay the car agent $5,000
for commission. How much should be included in GDP?
A. 5,000 B. 15,000 C. 20,000 D. 25,000
Explanation:

Ø Gross Investment expenditure (GI) / Gross domestic (total) capital formation (Textbook P.17)
Gross Investment expenditure (GI)
= Gross domestic fixed capital formation +Change in stock/ inventory
¨ Includes and (*construction value Textbook P.____), ,
and .
¨ the values of change in
¨ add the value of increase in inventories and deduct the value of decrease in
inventories
Ø Excludes and WHY???

Book 5 Ch.1 National Accounting (1) 3

Ø GI = Net investment expenditure (NI) + depreciation (Dep)
GI / Gross Domestic Capital Formation
=
GFI/ Gross Domestic FIXED Capital Formation Change in inventories
=
Dep/ Capital formation NFI/ NET Domestic FIXED Capital Formation Change in inventories
=
Dep/ Capital formation NI / Net Domestic Capital Formation
Source: Economics in One Week HK Joint-Us Press Ltd.

Explain why households’ expenditure on buying a new residential housing unit are not
counted in consumption expenditure to calculate GDP?
Ans:

Illustration-2
In 2018, Adike Limited produced $10,000 worth of sport shoes with using a new machine which costs
$5,000. However, the total expenditure on sport shoes was only $6,000. How much should be included
in the calculation of GDP in 2018?
Consumption expenditure =
Investment expenditure =
Thus, GDP in 2018 is

Illustration-3 (Change in inverntories)

With a stock left $4,000 from 2018, Adike Limited planned to produce less in 2019. Only $8,000 worth
of sport shoes was produced this year. However, all the shoes were sold out at the end of 2019 because
of the strong demand in the market. How much should be included in the calculation of GDP in 2019?
Consumption expenditure =
Investment expenditure =
Thus, GDP in 2019 is
* Points to note:
Change in stock also includes:
i change in the stock of raw materials held by business.
ii the value of "work in progress" (e.g. partly-finished construction work)

Book 5 Ch.1 National Accounting (1) 4

Illustration-4 (Work-in-progress)
A building is under construction in the current year. If completely finished, the building can be sold at a
market price of $2 billion. If only half of the construction work can be completed at the end of this year,
will the work contribute NOTHING to GDP of the current year?

Yes/No, the proportion of work completed at the end of this year will/will not be
counted in the GDP of the current year.
It is regarded as
Thus, GDP of the current year is

Ø Government expenditure (G = GCE + GIE + Transfer Payment) Textbook P.18-19

¨ Spent by on purchasing goods and services
¨ Excludes (e.g. unemployment assistance) since it only
the income from one to another.
¨ Government consumption expenditure is valued at cost instead of market value.
¨ Government investment expenditure (i.e. expenditure on infrastructures) of all
departments on fixed capital and investment is a component of gross investment
expenditure.

Illustration-5
Explain why the travel subsidy from government to students should not be included in GDP but the
travel subsidy from government to civil servants for business trip should be included in GDP?

Ø Net exports NX Textbook P.19

What is NET export?

¨ Export is included because they are part of the made by

¨ Total export (TX) of goods includes exports(Dx) and (Rx)

¨ Import is excluded because goods are not produced by ___________

Book 5 Ch.1 National Accounting (1) 5

Illustration-6
Samson bought a Happy meal from McDonald at $25. Suppose all the ingredients of making the meal
are bought from local suppliers. However, the free toy gift that included in the meal was made in China.
The imported value of each of the free toy gift including transportation services charges worth at $5.
How much should be included in HK’s GDP in the current year?

Illustration-7
Example: Given the following data:
Consumption expenditure $450
Land and building $500
Increase in stock $40
Government expenditure $600
Import $150
Share in the market $1,000
Transaction value of a second-hand mobile $2000
Total export $100
Re-export $20

The value of the GDP =

P.21 Test yourself 1.5 a-g
by Bart Yip
The output / production approach Textbook P.9
The value-added approach
= value of - value of OR

= value of - value of
Ø Includes goods only
n Excludes goods to avoid double counting because the
intermediate products are produced by other producing units.

Example:
Price ($) Contributions to the society ($)
Wheat 10 10
Flour 18 8
Bread 30 12

The value of the GDP =

Book 5 Ch.1 National Accounting (1) 6

Illustration-8
Imported
materials $4M Hill Cheung $30M Grand Hill Property $80M
Consumers
Construction Development Co. Ltd.
Materials Co. Ltd.
Local $3M
materials

I. Value-added by Local material suppliers:

II. Value-added by Hill Cheung Construction Materials Co. Ltd.to Grand Hill Property
Development Co. Ltd.: $
III. Value-added by Grand Hill Property Development Co. Ltd.:
________________________________________
IV. GDP of Hong Kong = _______________________________________________
V. Using the expenditure approach to compute the GDP of Hong Kong.
=_______________________________________________

Remarks
Value-added by OVERSEAS resident producing units MUST BE EXCLUDED from the GDP.
The two approaches give same value of the GDP given that there is NO government intervention

Practice CE 97
11.(a) Suppose $1 million worth of seafood is imported to Hong Kong. Half of it is sold to local
households at $0.8 million and half to local restaurants at $0.7 million. These restaurants cook
and sell the seafood to their customers at $1.6 million of which 0.6 million is tourist spending.
(ii) (I) The above transactions will also affect Hong Kong’s GDP. Use TWO different
measurement approaches to calculate the change.
(4 marks)

Expenditure approach:

Output approach:

Book 5 Ch.1 National Accounting (1) 7

Difference between GDP at factor cost (GDPFC) and GDP at market price (GDPMP)
**Textbook P.11

Value from expenditure approach

GDPMP ~ It measures the value of final outputs.

GDPFC ~ measures the value of final outputs .

Value from output/ value-added approach

GDPFC + – = GDPMP

Ø Indirect business tax is included in the of goods and services while

subsidies should be ___________ from the market price.
Ø Indirect business tax makes the national expenditure (GDPMP) is lager / smaller than GDPFC.
Ø Subsidies make the national expenditure(GDPMP) is lager / smaller than GDPFC

Illustration-9
Component Million Component Million ($)
($)
Private consumption expenditure 3000 Imports of goods 200
Government consumption expenditure 2000 Export of services 300
Gross domestic fixed capital formation 400 Imports of services 200
Change in inventories -20 Indirect taxes 400
Domestic exports of goods 500 Subsidies 200
Re-exports of goods 100
GDP at market prices =

GDP at factor cost = GDPMP

Practice
The higher the amount of indirect tax, the higher the value of GDP at market price and greater the
difference between the value of GDP at market price and sum of the value-added. Do you agree?

Equation:

Book 5 Ch.1 National Accounting (1) 8

Items excluded in GDP Textbook P.4-5
Items Explanations
1. Intermediate goods The value has already calculated in the
goods.

In theory, they should be included in calculation based

2.Non-marketed goods, unreported
on the international standard. However, they may be
and illegal transactions ignored as the data is difficult to collect in reality.

The values are excluded as the data is NOT available to

the government.

e.g. Production for own consumption, private tutorial,

smuggling

3. Second-hand goods They are not produced and their first sell
had been counted already in the year of production.

*** 4.Transactions on shares and Those transactions are only

bonds which do not involve any
production.

5. Expenditure on welfare It is not accompanied by

payment
It is only an income ___________________.

6. Income from gifts, gambling They do NOT involve any corresponding production.
and lucky draws.

Points to note: No market value but included in GDP

1. The rental value of owner-occupied housing unit is estimated and counted in GDP.
2. Public hospital’s contribution to GDP is measured by its cost, not its market value.

*** Should the dividends from shares be included in GDP????

Book 5 Ch.1 National Accounting (1) 9

 Difference between Gross Domestic Product (GDP) and Gross National Income (GNI)

**Textbook P.23-24

Gross national income (GNI) is the by the

of an economy from engaging in economic activities in a specified period.
It can be called Gross National Product (GNP)

***Resident individual refers to those people who normally stay (>= 1years) in the territory,
irrespective of whether the economic activities are carried out within or outside the economy.
Resident organizations refer to those which ordinarily operate in the economic territory.

It refers to income earned by RESIDENTS from providing factor services to OVERSEAS

GNP = GDP + factor income from abroad

Net income earned from abroad (NIFA)
- factor income to abroad

It refers to income earned by NON-RESIDENTS from providing factor services to LOCAL

Illustration-11

A and B represent the RPUs in both countries. Production value

A B A A B B B
of each of the A and B are $2 and $3 respectively.
A B A A A
All the values of B in Country X are contributed by resident of
B A A B B B B
Country Y. Meanwhile, All the values of A in Country X are
B A A B
contributed by resident of Country X.

Country X Country Y

GDP NIFA GNI/ GNP

Country X

Country Y

P.25 DSE misconceptions 1.3

Book 5 Ch.1 National Accounting (1) 10

Illustration-10
Should the following items include in GDP or GNP/GNI of Hong Kong?
**GNP = GDP + factor income from abroad- factor income to abroad
Value of HK’s Value of NIFA Comparison
GDP
1. Paul, a Hong Kong resident, was
employed by a financial institute in
Count/ IFA (+)/ ITA(-)
United States. He earns US50,000 half GDP > / <
a year. Not Count Not affect GNP
2. Mr. Kam, a Korea professor, was
invited to teach at the University of
Count/ IFA (+)/ ITA(-)
Hong Kong for a semester. He earned GDP > / <
$200,000 from being a visiting lecturer. Not Count Not affect GNP
3. Kan, a Hong Kong resident, receives Count/ IFA (+)/ ITA(-)
$5,000 dividends from a UK company. GDP GNP
Not Count Not affect
4. A mainland investor bought HSBC Count/ IFA (+)/ ITA(-)
shares in HK last year. He received GDP GNP
Not Count Not affect
$1,000 dividends in the current year,

5. Mr. Chan, a Chinese resident,

Count/ IFA (+)/ ITA(-)
purchased an apartment in Sheung GDP GNP
Shui. He receives a rental income $ Not Count Not affect
80,000 per year.

6. A Filipino maid has worked in Hong Count/ IFA (+)/ ITA(-)

Kong for two years. GDP GNP
Not Count Not affect

* IFA – Income from abroad/ ITA-Income to abroad

Test yourself 1.6 Textbook P. 25

Book 5 Ch.1 National Accounting (1) 11

Practice-CE
1996
3. Share prices of Vitasoy International Holdings Limited fell sharply because some of its products
were found to be contaminated and were destroyed.
(b) Explain whether the value of these destroyed products would be included in the calculation
of Hong Kong‘s gross national product. (GNP/GNI = GDP +NIFA)
(2 marks)
4. A traffic light, which was worth $1,500, was knocked down in a traffic accident. The
driver was fined $3,000 and the government used $2,000 to install another traffic light.
(a) What is the change in the gross domestic product (GDP) at factor cost brought about by this
incidence? Explain your answer.
(2 marks)
3.

4.

Book 5 Ch.1 National Accounting (1) 12

MC
1. Which of the following ways of measuring output involves double counting?
A. summing up the expenditures on all final goods and services
B. summing up the incomes earned by all factors of production
C. summing up the values added in all production stages
D. summing up the values of all market transactions (CE-92)

2. A farmer sold $100 worth of eggs to Paul and $200 worth to Mary. Paul used them for private
consumption but Mary used them for making cakes which she later sold for $300. What is the value of
the national income created in these transactions?
A. $300. B. $400. C. $500. D. $600. (CE-88)

3. Price of Price of Price of

wheat flour instant noodles
Farmer---------- Miller--------- Noodle Factory------------- Consumer
($1) ($1.5) ($3.5)
The value added by the noodle factory is ___________.
A. $1.5 B. $2 C. $3.5 D. $6 (CE-89)

Study the table below and answer questions 4 and 5:

GDP components $million
Private Consumption Expenditure 173
Government Consumption Expenditure 19
Gross Domestic Fixed Capital Formation 54
Exports of goods 235
Imports of goods 232
Exports of services 47
Imports of services 32
4. The value of the net exports of goods and services is (CE-87)
A. $3 million. B. $15 million. C. $18 million. D. $282 million.

5. The value of the Gross Domestic Product is (CE-87)

A.$228 million. B.$232 million. C.$246 million. D.$264 million.

6. In using the expenditure approach to calculate the Gross National Product (GNP) of an economy,
imports should be deducted because:
A. Some imports are substitutes of domestic products. B. Some imports are intermediate goods.
C. Imports will lead to payments to foreign countries.
D. Imports are the expenditure on goods and services produced by foreign countries. (CE-96)

Book 5 Ch.1 National Accounting (1) 13

7.
$million
Private consumption expenditure 40
Government consumption expenditure 10
Gross domestic fixed capital formation 10
Change in stocks 1
Total exports of goods 80
Domestic exports 70
Re-exports 10
Imports of goods 60
Exports of services 20
Imports of services 30
Inflow of capital 30
Outflow of capital 15
The GDP of the economy in that year is (CE-93)
A. $61 million. B. $70 million. C. $71 million. D. $81 million.

8. If GNP is greater than GDP,

A. depreciation is greater than zero. B. net income from abroad is greater than zero.
C. transfer payments are greater than zero. D. exports are greater than imports. (CE-93)

MC answers

1 D 2 B 3 B 4 C 5 D
6 D 7 C 8 B

DSE Question
1 2 (GDPFC) 3(GNI)
D13-22 A D22-24 A C10-27 B D22-27 B
C11-27 C D21-23 B C10-28 A D20-25 A
C10-26 B D17-25 A C09-27 A D18-25 B
C09-28 C D16-23 C C09-28 C D13-21 A
C08-26 C D14-24 C P12-21 C
C05-07 B D12-22 B C11-31 D
C04-30 B P12-20 C C10-30 A
C03-26 C C11-26 B C09-30 B
C01-28 C C11-27 C C08-27 C
C10-26 B C07-26 C

Book 5 Ch.1 National Accounting (1) 14