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13. National Income Accounting (2)

13. National Income Accounting (2). Chapter 13 : main menu. Theory in Life 13.1. The growth rate of real GDP in Hong Kong How is the growth rate of real GDP calculated? What is its recent trend in Hong Kong?. Theory in Life 13.1. The growth rate of real GDP of a current period is found by :.

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13. National Income Accounting (2)

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  1. 13. National Income Accounting (2)

  2. Chapter 13 : main menu

  3. Theory in Life 13.1 • The growth rate of real GDP in Hong Kong • How is the growth rate of real GDP calculated? What is its recent trend in Hong Kong?

  4. Theory in Life 13.1 • The growth rate of real GDP of a current period is found by : Real GDP growth rate Real GDP of current period – real GDP of previous period x 100% = real GDP of previous period

  5. Theory in Life 13.1 • The following table shows the real GDP of Hong Kong at constant (2000) prices in recent years : Table 13.1 Real GDP of Hong Kong at constant (2000) prices (Source : Hong Kong Census and Statistics Department)

  6. Theory in Life 13.1 • From the figures, we can see that the Hong Kong economy experiences mild growth in recent years. • Fig 13.1 Growth rates of Hong Kong’s real GDP and real GDP per capita (Source : Hong Kong 2002)

  7. Concept Explorer 13.1 • Inferring growth rates of prices from GDP statistics • How to infer growth rates of prices from the growth rates of GDP statistics?

  8. Concept Explorer 13.1 • Let P = price level, Q = volume of output (i.e. real GDP). From production approach, as P x Q = Nominal GDP, Nominal GDP This shows that: Q = P

  9. Concept Explorer 13.1 Nominal GDP Also, as P x Q = Nominal GDP, P = P This shows that:

  10. Concept Explorer 13.1 The following example illustrates the above concepts. The table below shows the nominal and real GDP of an economy in two years: Table 13.1

  11. Concept Explorer 13.1 In the period 2003 - 04, growth rate of nominal GDP = $(4,000,000 – 3,000,000)m x 100% $3,000,000m = 33.33% $(3,200,000 – 3,000,000)m x 100% growth rate of real GDP = $3,000,000m = 6.67% As growth rate of nominal GDP is greater than that of real GDP, prices must have increased.

  12. Concept Explorer 13.2 • Inferring growth rates of population size from GDP statistics • How to infer growth rates of population size from the growth rates of GDP statistics?

  13. Concept Explorer 13.2 Nominal GDP , As GDP per-capita = Population Size _Real GDP__ . This shows that, real GDP per-capita = Population Size

  14. Concept Explorer 13.2 Real GDP_____ . This shows that, Also, population size = Real GDP per-capita

  15. Concept Explorer 13.2 Refer to table 13.1 above. In the period 2003 – 04, $(436,666.27 – 300,000) x 100% Growth rate of real GDP per-capita = $300,000 = 42.22% As the growth rate of real GDP is less than that of real GDP per-capita, population size has decreased.

  16. Progress Checkpoint 1 Q 13.1 The following table shows the prices and quantities of two goods produced in two years by an economy: Show your working in the answers of the following questions: (a) Calculate nominal GDP in 2004 and 2005 respectively. (b) Calculate real GDP in 2004 and 2005 respectively. (c) Name the approach you have used.

  17. Progress Checkpoint 1 • (a) Nominal GDP (2004) = PA(04) x QA(04) + PB(04) x QB(04) = $200 x 200 + $150 x 300 = $85,000 Nominal GDP (2005) = PA(05) x QA(05) + PB(05) x QB(05) = $350 x 450 + $200 x 350

  18. Progress Checkpoint 1 • (b) Real GDP (2004) = PA(04) x QA(04) + PB(04) x QB(04) = $200 x 200 + $150 x 300 = $85,000 Real GDP (2005) = PA(04) x QA(05) + PB(04) x QB(05) = $200 x 450 + $150 x 350 = $142,500 • (c) Production approach.

  19. Progress Checkpoint 1 Q13.2Given the following data of an economy : Using year 2000 as the base period, calculate the real GDP of 2001 and 2003 respectively.

  20. Progress Checkpoint 1 100 Real GDP (2001)= $195 million x = $185.71 million 105 100 = $195.16 million Real GDP (2003) = $242 million x 124

  21. Progress Checkpoint 1 Q13.3 Determine how prices and population size have changed in the following case.

  22. Progress Checkpoint 1 $(1,800,000 – 1,500,000)m x 100% Growth rate of nominal GDP = $1,500,000m = 20% $(2,000,000 – 1,500,000)m x 100% Growth rate of real GDP = $1,500,000m = 33.33% As the growth rate of nominal GDP is less than that of real GDP, prices have decreased.

  23. Progress Checkpoint 1 $(400,000 – 375,000)m x 100% Growth rate of real GDP per-capita= $375,000m = 6.67% As the growth rate of real GDP is greater than that of real GDP per-capita, population size has increased.

  24. Theory in Life 13.2 • Local and international affairs affecting Hong Kong’s GDP • As Hong Kong is a highly open economy, its GDP is easily affected by both local and international affairs. How will EACH of the following affect Hong Kong’s GDP?

  25. Theory in Life 13.2

  26. Theory in Life 13.3 • Using real consumption per-capita to measure living standard • There are limitations in using nominal GDP to measure living standard. What are they? How can they be (partially) solved?

  27. Theory in Life 13.3 • Nominal GDP contains the effects of price changes but does not consider population size. Also, GDP contains the expenditure of firms, government and foreign countries which do not directly raise living standard. Therefore real consumption per-capita can be a better indicator in measuring living standard. The following example illustrates this concept.

  28. Theory in Life 13.3 The following table shows data concerning a certain economy.

  29. Theory in Life 13.3 With the above data, we can calculate the following :

  30. Theory in Life 13.3 • From real GDP per-capita, it seems that the living standard in 2000 was higher. Yet the real consumption per-capita is higher in 2004. Therefore the living standard of the economy is in fact higher in 2004.

  31. Progress Checkpoint 2 Q13.4(a) Name TWO demand side factors that affect GDP. (b) Name TWO supply side factors that affect GDP.

  32. Progress Checkpoint 2 • Consumption expenditure, investment expenditure, • government expenditure, exports and imports (any two). • (b) Capital, land, labour, entrepreneurship, technology (any two).

  33. Progress Checkpoint 2 Q13.5 Explain with TWO reasons why real GDP per-capita is better than nominal GPD in indicating the general living standard.

  34. Progress Checkpoint 2 Price changes and population size affect the validity of nominal GDP as an indicator of the general living standard. These two effects are removed in real GDP per-capita.

  35. End of Chapter 13

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