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Economics

Economics. Chapter 1 National Income. Measuring indicators. Do you think Hong Kong is a rich city? Why? In what way do we measure the economic performance of a city? Indicators Income Employment / Unemployment Production Consumption Price level Living standard Freedom. Price ($). S.

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Economics

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  1. Economics Chapter 1 National Income

  2. Measuring indicators • Do you think Hong Kong is a rich city? Why? • In what way do we measure the economic performance of a city? • Indicators • Income • Employment / Unemployment • Production • Consumption • Price level • Living standard • Freedom

  3. Price ($) S P • In microeconomics, • Price • Quantity • In macroeconomics, • General price level • Aggregate output D Quantity (units) 0 Q General price level ($) AS P AD Aggregate output (units) 0 Q

  4. National income • Measurement of output • Output or income a region gets from production within a period of time (usually one year) • Measure the aggregate output by adding up the market values of different outputs • It shows: • economic development • quality of life

  5. Stock and flow concepts • Stock • Value of output = a quantity measured at a certain point of time • Wealth = market value of one’s possessions at a certain point of time • Capital stock = value of capital owned by a firm at a certain point of time • E.g. • Investment of the year (increase in capital owned) • Depreciation (decrease in capital owned)

  6. Stock and flow concepts • Flow • Value of output = a quantity measured in a period of time (i.e. rate) • Income & expenditure = inflow and outflow of money in a certain period of time • Investment and depreciation = increase and decrease in the value capital owned in a certain period of time http://www.reffonomics.com/TRB/chapter21/GDP/realgdp4.swf • GDP is a flow, because it is measured yearly.

  7. National income • Measurement of aggregate output • GDP = Gross domestic product • GNP = Gross national product

  8. GDP • The total value of production of all resident producing units of a region in a specific period (usually a year or quarter). or • It is the market value of all final goods and services produced inside a country in a year (or a quarter).

  9. GDP • Resident producing units of a region • Individuals: • People who normally live in the region • E.g. HK citizens • Organizations: • Companies taking the region as the centre of economic interest • E.g. 7-Eleven • Imported goods are excluded

  10. GDP • Total value of final goods and services. • Value of final goods = $1,000 • If value of intermediate and final goods are counted ($400+$1000), it will be double counting ($400) Intermediate good Fish: $400 Final goods Sushi: $1000 Pay: $1000 Earn: $400 Earn: $1000 - $400 = $600

  11. Items not counted in GDP • Past inventories • Not produced within the period • Already counted in the GDP in previous period • Second-hand goods • Already counted when produced in the first time • Double counting • Unpaid household services for self-consumption within household • Housework • Caring of own children

  12. Items not counted in GDP • Intermediate products • Goods and services used up as inputs • E.g. • Raw materials • Semi-finished goods • Financial assets • Shares and bonds • Futures and options • Transfer payment • Transfer of wealth, no production involve • E.g. Gov’t subsidy, CSSA • Capital gain • Increase in the market value of an asset, but not production • E.g. Selling the flat with a higher price

  13. Should the following be included in calculation of GDP in 2010? Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No • Stock of MP3 players produced in 2008 • Stock of MP3 players produced in 2010 • Sony α3 camera resold in Yahoo! Auction • Canon D5 camera sold in Broadway • Hourly paid private tutor help you revising Economics • You help your brother understanding his Math problems • Adidas football you bought for fun • Adidas football South China Athletics Asso. bought for training the football players • HSBC shares • Commission to an agent from buying and selling HSBC shares • Clinical voucher (醫療劵) given by the gov’t (without using it) • Clinical voucher (醫療劵) given by the gov’t (after using it) • A person has $2 million gain from selling his ancient flask • Cheung Kong (Holdings) Ltd. gain $1000million from selling the flats in a new estate

  14. Basic concept of measuring GDP Income = $50 Output value = $50 Expenditure = $50 Output value = Expenditure = Income

  15. Basic concept of measuring GDP A. Three approaches for GDP • Expenditure approach • Final goods • Production approach • Output value of producing units • Income approach • Factor income

  16. Basic concept of measuring GDP B. GDP at market price and factor cost Given: Unit tax = $1200 and Subsidy = $200 GDPMP = GDPFC + Indirect taxes – Subsidies Output value $3000 Tax $1200 Subsidy $200 GDPFC Expenditure $4000 GDPMP Tax $1200 Subsidy $200 Income $3000

  17. Expenditure approach • Total expenditure on final goods • Subtract (not include) the value of imports GDP = C + I + G + X - M Import Export Gov’t expenditure Gross Investment expenditure Private consumption expenditure

  18. Expenditure approach C - Private consumption expenditure (C) • Household expenditure on goods and services G - Government consumption expenditure • Compensation of civil servants (e.g. salary) • Purchasing good or services • Not include: transfer payment

  19. Expenditure approach I - Gross investment expenditure (I) • Capital formation • Change in inventories • Depreciation included • Gross investment (I) = Gross domestic fixed capital formation + Change in inventory = Net domestic fixed capital formation + Depreciation + Change in inventory = Net investment + Depreciation

  20. Expenditure approach X - Exports • Selling goods or services to foreign countries • Total exports = Xgoods + Xservices + Xre-exports M - Imports • Purchasing goods or services from foreign countries • Total import = Mgoods + Mservices Net exports (NX) = X - M

  21. Expenditure approach • The net domestic product (NDP) • Equals the gross domestic product (GDP) minus depreciation on a country's capital goods. • Capital that has been consumed over the year • in the form of housing, vehicle, or machinery deterioration. • Capital consumption allowance • the amount of capital that would be needed to replace those depreciated assets. • NDP = GDP - Depreciation

  22. Try it.

  23. Calculate GDP (p.16) • Net exports = X – M • = (Xgoods + Xservices + Xre-exports )– (Mgoods + Mservices) • = $[(100 + 13 + 15 ) – (80 + 20)] billion= $28 billion • GDP = C + I + G + X – M • = $ ( 80 + 20 + 15 -8 + 100 + 15 + 13 – 80 – 20 ) billion • = $ 135 billion

  24. Calculate GDP

  25. Calculate GDP (HKCEE 2001, Q28)

  26. Value added (Production) approach • The sum of value added of all resident producing unit. • Counting of value from one production stage to another • The value of intermediate goods will be counted. Value added = Gross output value – Intermediate consumption $500 $800 A B C B Value added by = $800 – $500 = $300

  27. Value added (Production) approach • E.g. $200 $850 $1800 Carpenter Value of timber sold from carpenter to factory Value of sofa sold from factory to retailer Value of sofa sold from retailer to household Household Shop Factory

  28. Value added (Production) approach $850 $300 • E.g. Farmer Smoker Factory $200 • Market price of cigar = $850, Tax to Gov’t = $200 • Factory receives from smoker = $850-$200 = $650 • Value added by the factory = $650 - $300 = $350 • Consider production only:GDPFC = $300 + $350 = $650 • Consider also the tax:GDPMP = $300 + $350 + $200 = $850 Consider production only:GDPFC= Sum of value added of all resident production units Tax to Gov’t Consider the market value GDPMP = GDPFC + Indirect tax - Subsidies

  29. GDP from value added and expenditure approaches Indirect tax less subsidies Private consumption expenditure (C) Import contents in C, I, G and X Value added of all producing units Gross investment expenditure (I) GDPMP Government consumption expenditure (G) GDPFC Export (X)[Goods and services] GDPMP = GDPFC+ Indirect tax - Subsidies GDPMP = C + I + G + X - M

  30. Advantages of value added approach • Difficult to distinguish final goods and intermediate goods • E.g. A chef buys a fish. The fish can be: • Final goods – if the chef enjoy himself. • Intermediate goods – if he cook the fish and sell it. • So, value added is better than expenditure approach • Avoid double counting • All value added are counted for once.

  31. Example (p.20) • The diagram below shows the operation of C&K Furniture. • Its total sales revenue is $6,600. 1. a. GDP contributed by C&K = ? b. Why the contribution is lower than the total revenue? 2. Tax rate = 10% of the sales. Indirect tax = ? C&K’s contribution to GDPFC = ? Local made furniture $3,000 C&K Furniture Change in inventory - $800 Local consumers Imported furniture $1,000 Sales revenue $6,600 (indirect tax inclusive)

  32. Example (p.20) • The diagram below shows the operation of C&K Furniture. Q.1 • GDP contributed by C&K = $6,600 - $800 - $3,000 - $1,000 = $1,800 • The value added of other producing units (local and foreign furniture suppliers) and the value of the sold inventories must be subtracted from the total sales to get C&K’s contribution to GDP. Q.2 Let y be the sales (or value of goods) Market value = Sales + Tax = $6,600 y + (y x 10%) = 6600 y = 6000,  Indirect tax = $6000 x 10% = $600 GDPFC (contributed by C&K) = GDPMP (by C&K) – Indirect tax = $1,800 - $600 = $1,200 Consider the market value GDPMP = GDPFC + Indirect tax - Subsidies

  33. Income approach (out of syllabus) • The sum of all factor incomes • Compensation • Return for the labour resources • E.g. Salaries, bonus, commission, housing allowance… • Gross operating surplus • Return to company’s capital and entrepreneurship • E.g. Dividends, interests, shares…

  34. Per capita GDP • GDP divided by population • to study the living standard of the region • to eliminate the factor of population difference • can reflect the amount every person can get on average • E.g. Given in country A: • GDP = $5000 million • Population = 10 million persons

  35. Growth rate • % gain or lose in GDP • To study the economic growth • To forecast the economic situation, so that to make appropriate decisions • E.g. Given in country A: • GDP2010 = $5000 million and GDP2009 = $4000 million • Economy with GDP growth rate > 10% is consider well economic growth • PRC Gov’t aims at 8% growth in recently years

  36. Gross Domestic Product (GDP) of HK HK citizen Foreigner HK citizen HK citizen Production in HK Gross National Product (GNP) of HK Production in HK and Production in other countries

  37. Gross National Product (GNP) The total income earned by residents from engaging in economic activities in a given period of time. Assume GNP of Hong Kong in 2010:All income earned by Hong Kong residents (both living in or outside HK) in year 2010. GDP= Income of local residents in HK + Income of foreigners in HK GNP= Income of local residents in HK + Income of residents overseas

  38. Gross National Product (GNP) GNP GDP Factor income from abroad Factor income paid abroad = + - So, when calculating GNP,  income of HK residents (living in HK)income of HK residents (living overseas)income of foreigners who’re living in HK (< 2 yrs)

  39. Gross National Product (GNP) GNP GDP Factor income from abroad Factor income paid abroad = + - GNP GDP Net factor income from abroad = +

  40. Gross National Product (GNP) • Factor income from abroad (inflow) • Compensation of employees (domestic residents working overseas) • E.g. HK people working in Japan with short-term contract(income not included in GDP, but in GNP) • Factor income paid abroad (outflow) • Compensation of employees (foreign residents working in local) • E.g. US lecturer working in HK for 6 months(income included in GDP, but not in GNP)

  41. Gross National Product (GNP) • Factor income from abroad (inflow) • Investment income (domestic residents invest overseas) • E.g. HK people gain profits from selling flats in US(income not included in GDP, but in GNP of HK) • Factor income paid abroad (outflow) • Investment income (foreign residents invest in local) • E.g. US investor earn profit from his computer retailer shop in HK(income included in GDP, but not in GNP of HK)

  42. Gross National Product (GNP) • Assume GDP of HK in 2010 is $100 million. • Inflow • HK citizens gain $30million profit from investment in US • HK salesmen earn $5 million income from a short-term contract in Japan • Outflow • A UK citizen earn $1 million income for lecturing in HK University • An Italian business gain $10 million by investing a restaurant in HK • GNP = GDP + Income from abroad – Income paid abroad = [$100 + ($30 + $5) – ($1 + $10) ]million = $124 million

  43. Gross National Product (GNP) GDPMP = GDPFC + Indirect taxes – Subsidies $600million = GDPFC + ($10 - $5)million GDPFC = ($600 - $10 + $5) millionSo, GDP at factor cost = $595 million GNP = GDP + Net income from abroad= ($600 + $15) million= $615 million GDP at market price= C + I + G + X – M= ($200+$250+$100+$80-$30)million= $600 million

  44. Nominal GDP • In principle • GDP = total market value at market price • Measures “of the current period” • i.e. GDP at current market prices • Specified as: Nominal GDP • General formula = P x Q where P=Current price • From above date, Nominal GDP but overall production remains unchanged

  45. Real GDP • To compare the output of different period • Assume the price is constant • i.e. GDP at contant market prices • Specified as: Real GDP • General formula = P0 x Q where P0= Price in the base year • From above date, Real GDP remains unchanged even though the current price 

  46. Real GDP (textbook p.28) • GDP of 2000 at current market price = $10x2,000 + $20x2,000 = $60000 • GDP of 2004 at current market price = $15x1,000 + $25x1,800 = $60000 • Nominal GDP2004 = Nominal GDP2000 • It can’t reflect changes in output because changes in price also affect GDP at current market price • Base year = 2000 • GDP of 2000 at constant price = $10x2,000 + $20x2,000 = $60,000 • GDP of 2004 at current market price = $10x1,000 + $20x1,800 = $46,000 • Real GDP2004 < Rea GDP2000

  47. Finding Real GDP from Nominal GDP Quantity

  48. Example (textbook p.29) Quantity

  49. Example (textbook p.29)

  50. Further explanation

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