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claudianhandout2

ECON1002/1220Handout2

GrossDomesticProduct（GDP）:

Part1（Concept,Definition,Computation）

ISSUES

（1）WhatdoesGDPmeasure?

（RefertoCurrentIssues:

reading1）

（2）WhatinformationcanwegetfromthecompositionoftheGDP?

（RefertoCurrentIssues:

reading2）

OUTLINE

I.WhatisGDP?

Conceptually,whatisitsupposedtomeasure?

II.Howisitcomputed?

TheExpenditureApproach

Reference:

Chapter8（p.289-294）,CurrentIssues:

readings1&2

Graph1GrossDomesticProductoftheUS,JapanandChina（1980–2012）

Source:

IMF

Table1.TheGrossDomesticProductin2012

Source:

WikipediabasedonIMFdata

Ranking（bysize）

Country

GDP（millionsofUS$）

1

US

15,684,750

2

China

70068227037000000008,227,037

3

Japan

70065963969000000005,963,969

4

Germany

70063400579000000003,400,579

6

UnitedKingdom

2,440,505

10

India

1,824,832

15

Korea

1,155,872

27

Taiwan

473,971

32

Thailand

365,564

36

Singapore

276,520

38

HongKong

263,021

40

Philippines

250,436

57

Vietnam

138,071

72

Luxembourg

56,738

161

Bhutan

2,196

I.WhatisGDP?

Conceptually,whatisitsupposedtomeasure?

Conceptually,itissupposedtomeasurethetotaloutputproducedinthecountryduringthegivenperiodoftime.

∙Itcanserveasanindicatoroftheaggregateeconomicactivityofthecountryduringtheperiodoftime.

∙Somewouldalsouseitasaproxyofthesizeofaneconomy.

FormalDefinition

TheGrossDomesticProductofacountryinagivenperiodoftimeis

themarketvalueofallfinalgoodsandservicesproducedinthecountryduringtheperiod.

Detailexplanation

（A）“finalgoodsandservices”

Example1ConsiderthefollowingproductionthattookplaceinHongKongin2012.

MarketValue

TextileMillinHongKong:

producedcottonfabrics

$10

Giordano:

factoryinHongKongproducedashirtbypurchasingthe$10cottonfabricsfromthetextilemillabove

$120

HowwouldyouconsidertheabovetwoitemsincountingtheoutputofHongKongin2012?

Thegoodsandservicesproducedinacountrycanbeclassifiedintotwomaincategories.

Category1:

theyareproducedforthepurposeofconsumption（consumptiongoodsandservices）

Category2:

theyareproducedfortheproductionofothergoodsandservices

durablesvsnon-durablegoods

（a）intermediategoods

（b）capitalgoods

Category

（1）andcategory

（2）（b）areconsideredasfinalgoodsandservicesbutNOTcategory

（2）（a）.

ThereasonthatintermediategoodsandservicesareNOTconsideredas“finalgoodsandservices”isthatwewanttoavoid“doublecounting”whichcanover-estimatethegoodsandservicesproducedinthecountry.

Remark

Whataboutintermediategoodsandservicesproducedinthecountrybutsoldoverseas?

Example2ExtensionofExample1in2012

MarketValue

MarketValue

TextileMillinHongKong:

producedcottonfabrics

$10

$5

Giordano:

factoryinHongKongproducedashirtbypurchasingthe$10cottonfabricsfromthetextilemillabove

$120

AgnesB:

factoryinFranceproducedaT-shirtbypurchasingthe$5cottonfabricsfromthetextilemillabove

$200

Shouldthe$5worthofcottonfabricsbecountedintotheoutputofHongKongin2012?

（B）“producedinthecountry”

∙onlygoodsandservicesproducedinthecountryarecounted

Example3ExtensionofExample1in2012

MarketValue

TextileMillinHongKong:

producedcottonfabrics

$10

ButtonManufacturerinChina:

producedbuttons

$2

Giordano:

factoryinHongKongproducedashirtbypurchasingthe$10cottonfabricsfromthetextilemillaboveand$2worthofbuttonfromthebuttonmanufacturerabove

$120

HowwouldyouconsidertheabovethreeitemsincountingtheoutputofHongKongin2012?

（C）“marketvalue”

The“finalgoodsandservices”producedareevaluatedatthemarketpricesatwhichtheyaresoldwheneverpossible.

（D）“producedduringagivenperiodoftime”

∙theperiodisusuallyayearoraquarter

∙onlyfinalgoodsandservicesproducedduringtheperiodarecounted

II.Howisitcomputed?

TheGDPofHongKongin2012isaroundUS$263billion.

Howisitcomputed?

TocomputetheGDPofHongKongin2012,wehavetocalculatethemarketvalueofallfinalgoodsandservicesproducedinHongKongin2012usingtherealizeddata.

WecanexpresstheGDPmathematically.

Lettdenotethetimeperiod,saytis2012.

FinalGoodsandServicesproducedinthecountry

QuantityProduced

Pricesoldat

1

2

3

:

:

:

:

:

:

N

（Equation1）

NumericalExample1

GoodsandServices

CurrentPrice（

）

Quantity（

）

CurrentMarketValue

（

）

2004

（1）Converserunningshoes

（2）Nikerunningshoes

（3）Truck

$500

$400

$100,000

60

50

1

2007

（1）Converserunningshoes

（2）Nikerunningshoes

（3）Truck

$1,000

$800

$200,000

60

50

1

2008

（1）Converserunningshoes

（2）Nikerunningshoes

（3）Truck

$1,500

$1,000

$200,000

55

55

1

Note:

TheGDP’scomputedaboveareusingthepricesthatprevailinthecurrentperiod,hence,theyarethenominalGDP.

II.B.ExpenditureApproach

Conceptually,theGDPofacountryintimeperiodtis:

.

Inpractice,wecancomputetheGDPbytheaggregateexpenditurethathasoccurredforthegoodsandservicesproducedinthecountryintimeperiodt（ExpenditureApproach）.Wecanclassifytheaggregateexpenditureinto4maincategories.

（1）Consumption（C）

（2）Investment（I）

AggregateExpenditure

（3）GovernmentPurchase（G）

（4）NetExport（NX）

（1）Consumption（C）[PersonalConsumptionExpenditure（PCE）]

totalexpenditureonconsumptionofgoodsandservicesbydomestichouseholds

∙goods:

durablesandnondurables

∙services:

e.g.,medicalcare,education,haircuts

（2）Investment（GrossPrivateDomesticInvestment）（I）

Therearetwomaingroupsinthiscategory:

（a）totalexpenditureontheresidentialpropertiesinthefirsthandmarketbydomestic

households,

（b）totalexpenditureoninvestmentbyfirmsoperatinginthecountry.

Totalexpenditureoninvestmentbyfirmsincludes:

（i）businessfixedinvestment

capitalgoodsinthefirsthandmarket:

e.g.,factories,warehouse,machines,trucksetc.

（ii）changesinbusinessinventory

marketvalueofbusinessinventory（endoftheperiod）

-marketvalueofbusinessinventory（beginningoftheperiod）

∙inventoryreferstothegoodsthathavebeenproducedbutnotyetsold

NumericalExample

MarketValueofInventory

Beginningof2009

$10,000

Endof2009

$15,000

ChangeinInventory

$5,000（=$15,000-$10,000）

TheChangeinInventoryin2009（$5,000）willbecountedasInvestmentin2009.

Note:

“Investment”hereistherealinvestmentNOTfinancialinvestment.

FinancialInvestmentisinvestmentinfinancialassetslikestock,bonds,etc.

（3）GovernmentPurchaseofgoodsandservices（G）:

expenditureofthedomesticgovernmentongoodsandservices

Examples:

camerasfortakingIDphotos,furnitureingovernmentoffices,

uniformforpolice,policesalary

Note:

Theexpenditureofthegovernmentcanbeclassifiedintotwogroups,those:

∙forthepurchaseofgoodsandservices（examplesabove）,and

∙NOTforthepurchaseofgoodsandservices（transferpayments）.

Examplesof“TransferPayments”:

∙ComprehensiveSocialSecurityAssistanceScheme,

∙SocialSecurityAllowance（forelderlieswithageof65orabove）.

（4）NetExport（NX）

Sofar,inAggregateExpenditure,wehaveconsideredC+I+G.

TheC,G,andImayincludegoodsandservicesproducedbyforeigncountries（imports;IM）.

Examplesofimports:

CDsofKoreanPopSingers,Mercedes（fromGermany）,

SonyNotebook（fromJapan）

Hence,toevaluateexpenditureofgoodsandservicesproduceddomestically,weshouldsubtractimportsfromtheaboveexpenditureitems:

C+I+G-IM

Also,therecanbegoodsandservicesproducedinthecountrybutsoldtoforeignfirms,householdsorgovernment（exports;EX）:

theydonotshowupinC,GandI.

Examplesofexports:

CDsoflocalartistssoldinCanada,

expenditureofforeignvisitorsonlodgingorhospitalservicesinHongKong

Hence,toevaluateexpenditureofgoodsandservicesproduceddomestically,weshouldaddthemtotheaboveexpenditureitems:

AggregateExpenditure=C+I+G+EX-IM

LetNetExport（NX）=Export–Import=EX-IM

AggregateExpenditure=C+I+G+NX

GDP=AggregateExpenditureonthefinalgoodsandservicesproducedinthecountry

GDP=C+I+G+NX

Thus,

II.C.DoesthecompositionoftheGDP（expenditureapproach）varyacrosscountries?

Whatinformationcanweobtainfromthecomposition?

Table2.CompositionofGDP（ExpenditureApproach）（%ofGDP）,2010

Source:

US（p.294text）;China（WikipediabasedonChinaStatisticsYearbook）;HK（CensusandStatisticsDepartment,HK）

US

HK

China

Consumption

70.5

62.6

35.0

Investment

12.4

23.5

48.1

Government

20.7

8.4

13.2

NX

-3.6

5.5

3.7

Total

100

100

100

UsingthecompositionoftheGDPtoanalyzeaneconomy

（1）RefertoCurrentIssues:

reading2

（2）RefertoTable2above

Remark:

BecarefulwhenwecomparetheGDPofdifferenteconomies

（RefertoTable1onp.1ofthisHandoutorCurrentIssuesReading

（1））