Latest developments of compiling Gross Domestic Product of Hong Kong

1. Latest developments of compiling Gross Domestic Product of Hong Kong Speakers: Ms Sharon NG, Senior Statistician Miss Gloria MA, Senior Statistician Miss Winnie TAM, Statistician Ms Jasmin LEE, Statistician

2. Contents (I) Fundamental concepts and uses of GDP (II) Methods and data sources for compiling GDP (III) Chain volume measures of GDP (IV) Commonly asked questions on the concepts of GDP (V) Q&As

3. (I) Fundamental concepts and uses of GDP

4. What is Gross Domestic Product (GDP)? • Gross Domestic Product (GDP): measure of the total value of production (product) of all resident producing units of a country or territory (domestic) in a specified period, before deducting allowance for consumption of fixed capital (gross).

5. International statistical standards for the compilation of GDP 1993 System of National Accounts (SNA) • ensure GDP statistics compiled by different economies are based on consistentconcept, coverage and standardised framework • ensure international compatibility of GDP data

6. Three approaches for compiling GDP

7. Three approaches to measure GDP Supply Income Demand • Production measure of GDP( sum of value added of all economic activities) • Income measure of GDP (sum of compensation of employees and gross operating surplus of entrepreneurs) • Expenditure measure of GDP(final expenditures on consumption, capital formation, and exports less imports)

8. Given there can be 3 alternative approaches to compile GDP, are we supposed to have 3 figures of GDP or one single figure of GDP? In theory GDP estimates by the 3 approaches should be the same In practice Statistical discrepancy exists, as different data sources are used for different approaches Supply Income Demand

9. Availability of GDP statistics in Hong Kong • Expenditure-based GDP • Annual series from 1961 • Quarterly series from 1973 • Production-based GDP • Annual series traced back to 1980 • Quarterly series from 2000 • Income-based GDP • Once compiled for 1970 - 1980, but had discontinued since 1981   

10. Which approach is adopted for compiling and presenting the GDP figures?

11. Uses of GDP

12. Why is GDP so important? • Measure of economic growth

13. Measured by change in the volume measure of GDP over time (growth rate in real terms) Positive growth : expansion of economic activities Negative growth : contraction of economic activities GDP is commonly used for charting theeconomic growthof an economy

14. GDP as an indicator for measuring the economic growth • Year-on-year percentage change • GDP in real terms of a quarter compared with that of the same quarter last year e.g. In the first quarter of 2011, the GDP increased by 7.2% in real terms over a year earlier. GDP in real terms for Q1 2011 GDP in real terms for Q1 2010 - 1] x 100% [ 438,525* 408,926* = [ - 1] x 100% = 7.2% * In chained (2009) HK$Mn

15. GDP as an indicator for measuring the economic growth (Cont’d) Seasonally adjusted GDP series • Seasonally adjustment: remove the seasonal effects which repeat each year in a systematic manner • Quarter-to-quarter percentage change • - seasonally adjusted GDP of a particular quarter compared with that of last quarter • - capture turning point more promptly

16. Economic growth cycles in Hong Kong tracked by the real growth of GDP 1 2 3 4 5 2010 Average real growth each year 1962-1970: 8.8% 1971-1980: 9.0% 1981-1990: 6.7% 1991-2000: 3.9% 2001-2010: 4.0%

17. Economic slow-down in the late-1960s 1 2010 1967 social unrest

18. Economic slow-down in the mid-1970s 2 2010 1974-75 Oil Crisis

19. Economic slow-down in the mid-1980s 3 2010 1985 global slow down in external trade

20. Economic down-turn in the late-1990s 4 2010 1997/98 Asian Economic Crisis

21. Economic down-turn in the late-2000s 5 2010 Global financial tsunami in latter part of 2008

22. Uses of different measures of GDP • Production measure • Indicate the relative contribution of different economic activities to the total GDP • Income measure • Study the relative shares of compensation of employees and gross operating surplus of companies • Expenditure measure • Analyse the relative economic significance of household, government and investment expenditure • Indicate the degree of external orientation of an economic territory

23. (II) Methods and data sources for compiling GDP

24. Statistical system for GDP Establishment survey Household survey Trade statistics GDP Price data Gov’t Account Admin. data

25. Data sources for compilation of GDP(E)

26. Data sources for compilation of GDP(E) (Cont’d)

27. Data sources for compilation of GDP(E) (Cont’d)

28. Data sources for compilation of GDP(P)

29. Data sources for compilation of GDP(P) (Cont’d)

30. Data sources for compilation of GDP(P) (Cont’d) * Includes general administration, public order and safety services and other services provided by government departments which are not engaged in market activities

31. Data sources for compilation of GDP(P) (Cont’d) * Ownership of premises includes: (1) leasing services provided to tenants by owners of premises in their individual capacity; and (2) leasing services which owners of premises like households, government and private non-profit institutions, provided to themselves

32. Major activity: Production of goods Compilation of value added of the manufacturing sectorbased on data collected in ASEA

33. Compilation of value added of the construction sectorbased on data collected in ASEA • Major activity: Construction of both buildings and other structures and facilities undertaken by the construction contractors

34. Compilation of value added of the transport sectorbased on data collected in ASEA Major activity: Provision of services in carrying passengers and goods

35. Compilation of value added of the import/export, wholesale and retail trades sectorbased on data collected in ASEA • Major activity: Distribution of goods • * Expenditures on purchases of goods for sales are not included in the intermediate consumption and are deducted from the sales value in calculating the gross margin on sales of goods.

36. Major activity: Provision of financial intermediation services Compilation of value added of the financing sectorbased on data collected in ASEA

37. Starting from the reference year of 2009, the presentation of GDP(P) has been changed from Hong Kong Standard Industrial Classification (HSIC) V1.1 to V2.0. • To align with the International Standard Industrial Classification of All Economic Activities Revision 4 (ISIC Rev. 4) • This can better reflect the structural changes of the local economy and enhance international comparability of related statistics. Latest developments in the compilation of GDP(P)

38. Major changes in classification under HSIC V2.0 • Combination of the sectors of “agriculture and fishing” and “mining and quarrying”; • Introduction of a new sector of “information and communications”; • Splitting of the two sectors of “wholesale, retail and import/export trades, restaurants and hotels” and “financing, insurance, real estate and business services” into four. Latest developments in the compilation of GDP(P) (Cont’d)

39. The valuation of value added has been changed from factor cost to basic prices to follow international standard. This can better reflect the prices actually paid and received by the producers. • The basic price, measures the amount retained by the producer, is the price most relevant for the producer’s decision making. • The valuation at basic prices had been adopted by most of the statistically advanced economies, like the UK, Australia, Canada and Singapore. The adoption of such approach in Hong Kong will enhance the international comparability of Hong Kong’sestimates. Latest developments in the compilation of GDP(P) (Cont’d)

40. Value added at basic prices = Value added at factor cost + Taxes on production (e.g. government rent and rates and business registration tax) Value added at market prices = Value added at basic prices + Taxes on products* (e.g. alcoholic beverages, tobacco and hydrocarbon oil) * Payable per unit of goods and services Factor costvsBasic pricesvsMarket prices

41. Factor costvsBasic pricesvsMarket prices(Cont’d) + + = + =

42. How is ‘Implicit Price Deflator’ of GDP compiled? Implicit price deflators (IPD) of GDP and its expenditure components GDP in volume terms GDP at current prices = x 100

43. Current price GDP IPD of GDP  GDP in volume terms = Current price GDP GDP in volume terms  IPD of GDP = IPD of GDP In contrast to a deflator , an implicit price deflator is NOT an input for GDP in volume terms (a misconception)

44. Implicit Price Deflator of GDP (IPD) andConsumer Price Index (CPI) CPI • a measure of price changes encompassing goods and services purchased by households IPD of GDP • a broad measure of economy-wide inflation, encompassing a wide varieties on goods and services for consumption, capital formation (investment), exports and imports

45. (III) Chain volume measures of GDP

46. Chain Volume Measures of GDP • C&SD has replaced the constant price measures by the chain volume measures of GDP • Why? • Align with the latest international statistical guidelines • Provide a better measure of the real growth rate of the aggregate economic activity in an economy as compared with the constant price volume measure of GDP

47. Basic concepts of the volume measures of GDP

48. Change over time in the value of GDP can be factored into two components (v = p x q) • Change in prices of goods and services $20 $ 10each 2009 2010 2008

49. Value in 2009 increases by 20%, purely due to inflation $ 12 each $24 $20 $ 10 each 2009 2010 2008

50. Value in 2010 surges by 50%, as prices increase from $12 to $18 $ 18 each $36 $ 12 each $24 $20 $ 10 each 2009 2010 2008