Census and Statistics Department

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Census and Statistics Department Hong Kong
Special Administrative Region Peoples Republic
of China
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Ch.14 Measurement of NI (II)

• 14.1 Nominal and real national income
• Nominal (??) GDP / GDP at current (??) market
  prices refers to the market value of final goods
  and services expressed in terms of the price
  level of the current year. 
• Nominal GDP Current P x Current Q
• Overstate output change in times of inflation,
  misleading!

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Table 14.1 1990 1996 Nominal GDP
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Real GDP

• Real (??) GDP / GDP at constant (??) market
  prices refers to the market value of final goods
  and services expressed in terms of the price
  level of the base (??) year.
• Base year (old) P x Current Q
• Nominal GDP x base year PI/current year PI

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Constant price GDP

• GDP deflation
• value at constant prices for current year
• value at current prices x Price index base
  year / Price index current year

Example Current market price GDP in 1990 (base
year) 100 million Current market price GDP in
1999 150 million Price index (????) 100 in
1990, 120 in 1999 GDP deflation constant (1990)
market price GDP in 1999 150 million x 100 /
120 125 million

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Compilation of Constant Price GDP

• Since prices of goods and services change from
  year to year, the GDP valued at current prices
  for different years are not exactly comparable
  with each other.
• To remove the price change element, current price
  estimates are converted to constant price
  estimates.
• To compile the constant price GDP, a base year
  is chosen.
• Then obtain constant price measures by dividing
  current price value by an appropriate price index
  to remove the effect of price change (the process
  of deflation)

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What is GDP at constant prices?

• a volume concept
• shows the volume changes of domestic production
  over time as rate of change reflects the real
  growth
• having removed the effect of price changes
• Note
• Real concept is related to purchasing power
  and hence is more relevant to income statistics.

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Compilation of Constant Price GDP

• The change in the nominal value of the GDP (i.e.
  GDP at current price) can be expressed in terms
  of changes in the volume and prices of output.
• Mathematically (? change)
• ? Current price GDP ? Constant price GDP x ?
  Price

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Comparing real GDP real per capita GDP
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P.30 MED 14.1

• rise in nominal GDP gt rise in real GDP P
  rises
• rise in real GDP gt rise in real per capita
  GDP population rises

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P. 11
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Factors affecting actual national income
Actual GNP refers to output realized which is
closely related to the level of aggregate demand.
The actual output may not be the same as the
potential GNP.
X-M
C
I
G
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Factors affecting potential national income
Potential GNP is the maximum productive capacity
of an economy. It is also the full employment
output level. The actual output may not be the
same as the potential GNP.
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Factors affecting national income
side factors affecting potential GDP
side factors affecting actual GDP
P. 14
15
side factors
Consumption expenditure includes spending on
final goods and services, such as food and
clothing, by the private sector.
16
side factors
When people consume more, the consumption
expenditure and national income of the economy
will increase.
Consumption expenditure is normally the largest
item. 11/10
17
side factors
This refers to spending including expenditure on
the salaries and wages of civil servants,
spending on education, and public works like
roads, airport, port, railways, etc. Lower level
of government expenditure will reduce the
national income of a country.
18
side factors
Investment (gross domestic fixed capital
formation)
Investment refers to the private sectors
spending on capital goods. In technical terms of
national income accounting, investment generally
refers to gross domestic fixed capital formation.
This consists mainly of expenditure on plants,
machinery and equipment, and buildings and
construction (both residential and
non-residential). 
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side factors
Investment (gross domestic fixed capital
formation)
Investment depends on entrepreneurs expectations
about the future of the economy, the
profitability of their business or projects,
profits tax rate, and the level of interest
rates.
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side factors
Investment (gross domestic fixed capital
formation)
In general, a higher investment will lead to a
higher level of national income.
21
side factors
The higher its level of spending, the higher the
national income of the economy will be.
Salaries of teachers at government schools are
government expenditure.
22
side factors
Domestic exports are goods and services produced
by the domestic economy but shipped and sold to
foreign buyers. They therefore depend mainly on
the levels of national income or economic
activity of other countries.
23
side factors
A higher level of exports implies a higher
national income.
24
side factors
By contrast, total imports are goods and services
produced abroad but shipped and sold to domestic
residents. They therefore depend essentially on
the local territorys level of national income or
economic activity.
25
side factors
Imports represent payments to foreigners,
therefore the value of total imports should be
deducted from national income.
26
side factors
The word land means natural resources in
economics.
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side factors
Other things being equal, a country with a more
supply of natural resources has a higher
potential GDP over countries which lack such
resources.
Timber is a kind of land.
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side factors
Workers must use suitable tools, equipment and
machinery for efficient production. These are
known as capital.
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side factors
The larger the amount of capital per worker, the
higher the productivity will be.
30
side factors
Better quality of capital or greater quantity of
capital will improve labour productivity in
general. The potential national income level can
thus be increased.
31
side factors
15/10 Labour is an essential factor of
production. However, the important factor is the
productivity of labour, not the amount of labour
that is available.
32
side factors
The Hong Kong Productivity Council aims at
improving Hong Kongs labour productivity.
The more productive a labour force is, the higher
the potential GNP of that country.
33
side factors
The Hong Kong SAR Government has allocated
substantial resources to training and education
in recent policy planning. It has planned to
greatly increase the enrollment capacity for
tertiary education in coming years. Also there
are retraining programs for accommodating
structural change in the Hong Kong economy. Added
to this, the Government proposes to import
specialists from the mainland.
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side factors
The Employees Retraining Board helps the
unemployed to learn new skills.
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side factors
An entrepreneur must organize factors of
production efficiently. A good entrepreneur must
know what is happening in the world. He or she
must always be ready to introduce new products
and designs.
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side factors
Those countries which have larger numbers of
energetic entrepreneurs will usually have a
higher potential GNP.
Bill Gates brought about the success of Microsoft.
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side factors
Productivity can be raised by technical
knowledge. Highly developed countries adopt
information technology in many industries.
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side factors
Invention and innovation are the most important
factors behind sustainable economic growth.
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side factors
Many non-economic factors play a large part in
the economic growth of a country, such as stable
social conditions and stable political conditions.
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side factors
If a country is at war or has problems at home,
its national income will not grow steadily.
Israel, a country without political stability.
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side factors
That is why many developing countries, e.g.
China, see development through stability as an
important policy.
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side factors affecting potential GDP
side factors affecting actual GDP
P.36 CIF 14.1
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Effects on Hong Kong economy
Demand-side / Supply-side change
Change in GDP
Case
fall in aggregate demand
(a) a recession in Japan
e___________ decrease
mployment
falls
______
(b) a booming U.S. economy
rise in aggregate demand
e___________ increase
mployment
rises
______
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Effects on Hong Kong economy
Demand-side / Supply-side
Change in GDP
Case
rise in aggregate demand
increase in __________ expenditure
(c) more construction of infrastructure
rises
government
______
greater supply of potential output
(d) more training for workers
increase in p__________
rises
______
roductivity
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Effects on Hong Kong economy
Demand-side / Supply-side
Change in GDP
Case
rise in aggregate demand
increase in __________ / __________ expenditure
(e) the construction of HK Disneyland / West Rail
rises
investment
______
government
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Uses of national income statistics

• - To measure the standard of living
• A basis for industrial policies / To plan
  economic development
• - A criterion for international comparison
• - A basis for private business investment
  decision
• - To indicate the economy's performance

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Uses of national income statistics

• Measure of economic growth vs potential GDP

• Measure of economic size

• Measure of economic welfare of residents

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Application of GDPCompiled from Different
Approaches

• GDP(P)
• Economic structure as reflected by
  contributions to GDP by different economic
  sectors or industries
• Industry composition of economic growth
• Productivity

• GDP(I)
• Relative shares of returns to labour and
  entrepreneur

• GDP(E)
• Analysis of aggregate demand e.g.
  consumption, investment, exports

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Limitations of national income statistics

• Change in price level Overestimate, real GDP
• Change in population Overestimate, real per
  capita GDP
• 3. Income distribution even or uneven
• 4. Composition of goods C or I or G
• 5. Excludes non-market activities, housework
  underestimate
• 6. Congestion and pollution overestimate
• 7. Leisure time enjoyed underestimate

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Limitations of national income statistics

• 8. Others Different countries have different
  legal versus illegal activities underground
  economic activities quality of life is not
  measured quality improvement tax rate

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1. The real GNP of a country may understate the
living standard of its people because the
information
1
(1) does not include the non-market
activities. (2) does not reflect the effect of a
decrease in the general price level. (3) does
not reflect the improvement in the quality of the
goods and services produced in that
period. (4) does not include the increase in
pollution of the country.
2
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1. The real GNP of a country may understate the
living standard of its people because the
information
1
(1) does not include the non-market
activities. (2) does not reflect the effect of a
decrease in the general price level. (3) does
not reflect the improvement in the quality of the
goods and services produced in that
period. (4) does not include the increase in
pollution of the country.
The effect of change in price is removed in real
GNP.
1
2
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1. The real GNP of a country may understate the
living standard of its people because the
information
1
(1) does not include the non-market
activities. (2) does not reflect the effect of a
decrease in the general price level. (3) does
not reflect the improvement in the quality of the
goods and services produced in that
period. (4) does not include the increase in
pollution of the country.
The negative effect will lead to an overestimated
welfare.
2
2
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1. The real GNP of a country may understate the
living standard of its people because the
information
1
A. (1) and (2) only. B. (1) and (3)
only. C. (2) and (3) only. D. (3) and (4) only.
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2. Suppose a country experiences a 5 increase in
GDP measured at current market prices as well as
a 3 rise in GDP measured at constant prices. We
can conclude that
3
nominal GDP growth rate real GDP growth rate
inflation rate inflation rate nominal GDP
growth rate - real GDP growth rate.
3
(1) the general price level will increase by
2. (2) the nominal GNP will increase more than
the real GNP by 2. (3) the growth in the
production volume of goods and services will be
smaller than the growth in nominal GDP.
4
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2. Suppose a country experiences a 5 increase in
GDP measured at current market prices as well as
a 3 rise in GDP measured at constant prices. We
can conclude that
3
This means the real GDP growth rate.
4
(1) the general price level will increase by
2. (2) the nominal GNP will increase more than
the real GNP by 2. (3) the growth in the
production volume of goods and services will be
smaller than the growth in nominal GDP.
4
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2. Suppose a country experiences a 5 increase in
GDP measured at current market prices as well as
a 3 rise in GDP measured at constant prices. We
can conclude that
3
A. (1) and (2) only. B. (1) and (3)
only. C. (2) and (3) only. D. (1), (2) and (3).
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Homework 4 Q1 Suppose Country A has a higher
real per capita consumption level than Country B.
1
Give THREE reasons to explain why we cannot
conclude that people will prefer to live in
Country A as compared to Country B.
2
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Beware of the informations in the
question. The following points are not relevant
to the question (i) inflation (ii) population
(iii) composition of goods. This is because (i)
real measurement already eliminates the
effect of inflation (ii) per capita
eliminates the problem of population (iii)
consumption level resolves the bias of
composition of goods.
1
Suppose Country A has a higher real per capita
consumption level than Country B.
1
Give THREE reasons to explain why we cannot
conclude that people will prefer to live in
Country A as compared to Country B.
2
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Suppose Country A has a higher real per capita
consumption level than Country B.
1
Use a suitable sentence in answering the
question, i.e. Why we cannot conclude
2
Give THREE reasons to explain why we cannot
conclude that people will prefer to live in
Country A as compared to Country B.
2
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2
We cannot conclude because we do not know
- the i_________ d____________ of both countries.
3
Make sure to have comparative statements
for elaboration.
3
If the income of country A is more (evenly /
unevenly) distributed than Country B, then the
people of Country A may prefer to live in Country
B.
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2
We cannot conclude because we do not know
- the i_________ d____________ of both countries.
ncome
istribution
3
If the income of country A is more (evenly /
unevenly) distributed than Country B, then the
people of Country A may prefer to live in Country
B.
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2
We cannot conclude because we do not know
- the amount of leisure time.
If the leisure time enjoyed in country B is
(more / less) than Country A, then people in
Country A may prefer to live in Country B.
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2
We cannot conclude because we do not know
- other s_______ p______ such as the crime rate,
pollution and social instability of both
countries.
If the crime rate / pollution level is (higher /
lower) in Country A, then people in Country A
may prefer to live in Country B.
- other relevant points.
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2
We cannot conclude because we do not know
- other s_______ p________ such as the crime
rate, pollution and social instability of both
countries.
ocial
roblems
If the crime rate / pollution level is (higher /
lower) in Country A, then people in Country A
may prefer to live in Country B.
- other relevant points.
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HOMEWORK 3 Q.1 What will be the consequences /
effects of the construction of the West Rail upon
the GDP of Hong Kong? (4 MARKS)
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What will be the consequences of the construction
of the West Rail upon the GDP of Hong Kong?
The construction of the West Rail will lead to an
increase in _________________________
(consumption / investment / government)
expenditure. As a result, ____________________
(aggregate demand / aggregate supply) will rise.
investment / government
aggregate demand
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What will be the consequences of the construction
of the West Rail upon the GDP of Hong Kong?
The actual GDP of Hong Kong will then increase.
In addition, the West Rail can increase the
productivity of the Hong Kong economy (through
more efficient transportation), so potential GDP
will ____________ (increase / decrease) too.
increase
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HOMEWORK 3 Q.2 Suppose Country A has a higher
nominal GDP than Country B.
Give THREE reasons to explain why we cannot
conclude that people prefer to live in Country A
as compared to Country B.
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We cannot conclude that because we do not know
- the population size and therefore the
___________ (per capita / real) income of the two
countries.
per capita
If Country As population size is ___________
(larger than / smaller than) Country Bs, then
Country As per capita income as well as its
living standards in general may be lower than
that of Country B.
larger than
(Remark Example is required for explanation.)
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We cannot conclude that because we do not know
- the change in general price level / inflation
rate and therefore the _____ (per capita / real)
GDP of both countries.
real
If Country As general price level increases
faster than that of Country B, then Country As
real income as well as its living standards in
general is usually ___________ (higher than /
lower than) that of Country B.
lower than
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We cannot conclude that because we do not know
- the ____________ (quantity / composition) of
goods and therefore the availability of consumer
goods of both countries.
composition
If Country As GDP is mainly contributed to by
the production of capital goods (e.g. roads)
instead of consumer goods, the living standard of
Country A may, in general, be lower than Country
B.
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Note You may also compare Country A and Country
B (as in the above cases) in terms of
- the income distribution of both
countries. - other such as the crime rate / level
of pollution / leisure time / social instability
of both countries.
Reminder do not just list the factors without
elaboration to compare Country A and Country B.