CHAPTER 2 NATIONAL INCOME ACCOUNTING
2.1
Introduction
(a) National income statistics e.g.,
(NNP),
(NDP) and
(GNP),
(NI) are
(GDP),
which
describe the performance of an economy.
(b) They are used as measures of all
produced
goods and
services evaluated at
prices.
(c) Three key points in this definition :
(i) Currently produced
It is a stock / flow concept which measures the value of output per period of
time (usually a year).
 market transaction of second hand cars, old houses should / should not be
counted in the GDP.
(ii) Final goods and services
Intermediate goods are not counted in GDP to avoid
 Take a noodle making factory as an example, the value of wheat and flour
(
goods) should / should not be added to the value of noodle
(
goods) in calculating the GDP.
(iii) Evaluated at market prices
GDP is measured in dollar terms at market value.
 All
,
and self-provided goods and services are
excluded from the GDP.
Exercise 1
Study the following case and identify which items should be included in the
calculation of GDP.
On Mary’s birthday, her mother baked a cake which worth $250 if sold in the market.
Mary’s mother had spent $15 on buying eggs, $20 on flour and $30 on cream. And a
friend of Mary bought counterfeit CDs at $200 from a hawker as birthday gift.
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2.2
Circular Flow of Income
(p.13)
Households
Firms
real flow
-------- money flow
a.
c.
b.
d.
By definition, market value of all outputs =
2.3
=
Approaches of Measurement of National Income
(p.20)
(1) Expenditure approach
GDP =
Remarks :
(i) Buying flats are treated as
(ii) Change in stock is treated as
instead of
expenditure.
expenditure.
(iii) Buying stocks and shares are / are not investment.
(iv) Government expenditure is valued at
rather than at market prices.
(v) Transfer payments are included / excluded.
(2) Output / value-added approach
(3) Income approach
NI =
Remarks :
(i) Interest income from holding government bonds should / should not be included.
(ii) A capital gain is / is not an income.
(iii) NI is equal to NNP / GNP at
.
* From NI to personal income (PI) and disposable personal income (DPI) (p.17)
PI = NI
DPI = PI
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2.4
Related Measures of National Income Accounting
(1) GDP and GNP (p.18)
GDP measures the
value of all
goods and services produced by
in a given year.
The factors of production may be supplied by residents or non-residents.
GNP measures the total
earned by
from engaging in production in a
given year.
It does not matter where residents carry out their production.
* Resident production units :
They are production units which maintain a centre of
in the
economic territory of the country or region.
~ For organization, resident production units refer to those which normally
and
in the economic territory of a region.
* Residents :
It refers to those who
in the economic territory.
~ The residents of a region may or may not have the right of abode in a region.
~ Foreign employees working in HK on long term contracts (more than 1 year)
are / are not regarded as the residents of HK.
GNP = GDP +
Exercise 2
GNP > GDP, if the net income from abroad is
GNP < GDP, if the net income from abroad is
GNP = GDP, if the net income from abroad is
.
.
.
(2) NNP
NNP = GNP (3) GNP at market prices (GNPm) and at factor cost (GNPf) (p.16)
GNPf = GNPm
NI =NNP at
= GNPm
(4) GNP at current market prices (nominal GNP) and at constant market prices (real
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GNP) (p.19)
Implicit GNP deflator =
GNP (Y) /
GNP (Q) x 100
 reflect the overall price level (P)
(i.e., Y/Q x 100 = P  Q = Y/P x 100  Q = Y x 100/P where 100 is the price
index of the base year and P is the current overall price index and is known as
implicit GNP deflator.)
(5) GNP per capita
GNP per capita = GNP /
Exercise 3
1989
1990
1991
At current market prices
499,157
555,856
633,023
At constant 1980 prices
254,434
262,189
272,480
(a) What are the GDP implicit price deflators for all three years ?
(b) What are the inflation rates as measured by the GDP deflators for 1990 and
1991 ?
2.5
Limitations of National Income Statistics
(p.24)
(1) Non-market productive activities are left out
E.g., housewives’ work and volunteer services are excluded from the GNP. In
less developed countries, there are significantly
proportion of
non-market production. Hence, GNP may be
.
(2) Transactions in the underground economy are left out
GNP is then
.
(3) GNP may be enlarged by a large population size
Hence
GNP is preferred to measure the standard of living across countries.
(4) GNP is not a welfare measure in terms of leisure and pollution
The longer we work, the
the GNP, the
the leisure time. Under this,
GNP is
.
Industrial production produces pollution, but GNP does not take into account of
this, so the GNP may be
.
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(5) Uneven distribution of income
If national income is largely concentrated in the hands of a few people, the living
standard of the majority is still
.
(6) Composition of output may be distorted
Average standard of living will not be high (at present) if a large part of the GNP
consists goods for
or/and large part of government expenditure is
on
.
(7) Prices change over time
An increase in GNP at current market prices may not necessary imply a rise in real
GNP (which reflects the living standard). Maybe it is only the result of a rise in
the
.
(8) Exchange rate fluctuates overtime
The fluctuation in
affects the accuracy of converting statistics into
one single currency for cross country comparison.
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