ECON1220_GJK

Introductory Macroeconomics

1st Tutorial: GDP

TA Contacts

• Frankie Ho
• Email: [email protected]
• Office: KK1026

• Office hours:
• Tuesday 12:30 – 1:20, Wednesday 2:30 - 4:30, Friday
11:30 – 12:20
• Please email us if you wish to schedule an appointment
What is GDP
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Simple Example: Product Quantity Price
Apples 1,000 $5.00
Medical Services 50 $50.00
Clothes 400 $20.00

• GDP = 1,000 × $5 + 50 × $50 + 400 × $20

= $15,500
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• (1) Only include Final Goods and Services
• (2) Should be produced in the country
• (3) Should have market value
• (4) In the particular period of time
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Intermediate Goods and Services are not included in the
calculation of GDP.
GDP Items
• Intermediate Goods and Services are not included in the
calculation of GDP.
• Intermediate Goods and Services are used as inputs for
producing other goods and services.
• Example: flour for making bread, steel for making cars,
are also not counted in GDP.
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Final Goods and Services: the goods or services
purchased by a final user (will not be used as inputs for
producing other goods).
GDP Items
• Final Goods and Services: the goods or services
purchased by a final user (will not be used as inputs for
producing other goods).
• Example: education services provided by HKU, a lunch
boxes purchased at school canteen, smart phone
purchased by consumers.
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Example:
• A handbag produced in HK → counted in HK
GDP
• A handbag produced in Paris → not counted in
HK GDP
• Therefore, imported goods are excluded!!
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Should involve production in the country!
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Examples of not involving production:
• Transfer payment (e.g. unemployment benefits)
given by the government.
• Transactions of second hand goods.
• Transactions of stocks and bonds.
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• The transaction should have market value.
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Examples of no market value:
• A cake baked by yourself (which is valuable in the
market).
• Illegal transactions.
GDP Items
• The Gross Domestic Product (GDP) is the total market
value of all final goods and services produced in the
country during a particular period.
• Output produced in current year → included in GDP of
current year.
• Output produced last year → not included in GDP of
current year.
The Simple Circular Flows

Capital’s goods & services

Investment expenditure

→ Real flow: refers to the flow of goods, services and factor services
--> Monetary flow: refers to the counterpart of the real flow in monetary terms
Three Approaches of Measuring GDP
• Total Expenditures
= Total Output
= Total Income
• Three Approaches of measuring GDP
• (1) Expenditure Approach
• (2) Production Approach
• (3) Income Approach
Expenditure Approach
• GDP = C + I + G + X – M

• C – Consumptions by households
• I – Investment made by firms
• G – Government Spending on Goods and Services
• X – Exports of Goods to other countries
• M – Imports of Goods from other countries
Expenditure Approach
• GDP = C + I + G + X – M
Consumption expenditures $1000
• Example:
Investment expenditures 400
Government purchases 500
Exports 300
Imports 400
Wages 900

• GDP = $1000 + 400 + 500 + 300 – 400 = $1800

Production Approach
• GDP = the sum of all value-added by all stages of
production.
Production Approach
• GDP = the sum of all value-added by all stages of
production.

Stages of Beef Beef Burger made Customers

production Cattle → Processing → by Fast Food →

Farm Shop
Sale $100 $400 $1000
Revenues
Value- $100 $400 - $100 $1000 - $400
•added
GDP = $100 + $300 =$300
+ $600 = $1000
= $600
Income Approach
• GDP = sum of all incomes
= Profit + Wage + Rent + Interest
Tutorial Exercise (No need to submit)
• Suppose there are only two firms in the economy:
• Farm A grows strawberry. In 2016, it sold $10,000 worth of
strawberry to customers and $30,000 worth of strawberry
to Cafe B. It also pays $5,000 wages to its employees and
$10,000 rent to the landlord.
• Cafe B makes and sells strawberry cakes. In 2016, it sold
$80,000 worth of strawberry cakes to customers. It pays
$15,000 wages to its employees, $4,000 rent for its shop
and $2,000 interest payment to its loans.
Tutorial Exercise (No need to submit)
• What is the GDP of this economy, using the three
approaches?
• Detailed Answer will be uploaded onto Moodle by the end
of the next week.
Real GDP
• Real GDP is the total market value of all total output
adjusted for price changes.
• It is calculated at constant market prices (i.e. prices of
based year)
Real GDP
Quantity of Price of Quantity of Price of
Apples apple Jeans Jeans

Year 1 20 $5 10 $10
Year 2 16 $8 7 $14
• Nominal GDP in year 1 = $5 × 20 + $10 × 10 = $200
• Nominal GDP in year 2 = $8 × 16 + $14 × 7 = $226
• GDP increases even though total output drops!!!
Real GDP
Quantity of Price of Quantity of Price of
Apples apple Jeans Jeans

Year 1 20 $5 10 $10
Year 2 16 $8 7 $14
• Nominal GDP in year 1 = $5 × 20 + $10 × 10 = $200
• Nominal GDP in year 2 = $8 × 16 + $14 × 7 = $226
• Real GDP in year 2 = $5 × 16 + $10 × 7 = $𝟏𝟓𝟎
• Use base year price to get market values of
current year output!!
Real GDP
• A more general formula when prices and quantities of
each good are not provided:
Base year price index
• Real GDP = Nominal GDP ×
Current year price index
Per capita GDP
GDP
• Per capita GDP =
population
real GDP
• per capita real GDP =
population
GDP and GNP
• GDP: Gross Domestic Product
→ the total market value of all final goods and
services produced in the country in a particular
period of time.
• GNP: Gross National Product
→ the total market value of all final goods and
services produced by the citizens of the
country in a particular period of time.
• GNP = GDP + NIA, where NIA is net income from
abroad
Price Index
• Two measures of price level:

(1) CPI or Consumer Price Index

(2) GDP Deflator

Consumer Price Index (CPI)
Quantity of Price of Quantity of Price of
Apples apple Jeans Jeans

Year 1 20 $5 10 $10
Year 2 16 $8 7 $14
CPI of current year
Market Value of the 𝐁𝐚𝐬𝐞 𝐘𝐞𝐚𝐫 𝐛𝐚𝐬𝐤𝐞𝐭 at Current Prices
= × 100
Market Value of the 𝐁𝐚𝐬𝐞 𝐘𝐞𝐚𝐫 𝐛𝐚𝐬𝐤𝐞𝐭 at Base year Prices

• We fix the basket in the base-year!

Consumer Price Index (CPI)
Quantity of Price of Quantity of Price of
Apples apple Jeans Jeans

Year 1 20 $5 10 $10
Year 2 16 $8 7 $14
• Base-year is year 1

• Market Value of the 𝐁𝐚𝐬𝐞 𝐘𝐞𝐚𝐫 𝐛𝐚𝐬𝐤𝐞𝐭 at Year 1 Prices

= $5 × 20 + $10 × 10 = $𝟐𝟎𝟎
• Market Value of the 𝐁𝐚𝐬𝐞 𝐘𝐞𝐚𝐫 𝐛𝐚𝐬𝐤𝐞𝐭 at Year 2 Prices
= $8 × 20 + $14 × 10 = $𝟑𝟎𝟎
• CPI of year 1 = $200/$200 ×100 = 100
• CPI of year 2 = $300/$200 ×100 = 150
GDP Deflator
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
• GDP deflator = × 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
Consumer Price Index (CPI)
Quantity of Price of Quantity of Price of
Apples apple Jeans Jeans

Year 1 20 $5 10 $10
Year 2 16 $8 7 $14
• Nominal GDP in year 1 = $5 × 20 + $10 × 10 = $200
• Nominal GDP in year 2 = $8 × 16 + $14 × 7 = $226
• Real GDP in year 2 = $5 × 16 + $10 × 7 = $150

• What is the GDP deflator for year 1 and year 2?

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
• GDP deflator = × 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
GDP Deflator
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
• GDP deflator = × 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
• Recall that
Nominal GDP in year 2 = $226
Real GDP in year 2 = $150
226
• GDP deflator of year 2 = × 100 =150.67
150
• GDP deflator of year 1 = ?
Inflation Rate
• Inflation Rate
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑜𝑓 𝑡 −𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑜𝑓 (𝑡−1)
•=
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑜𝑓 (𝑡−1)
Difference between CPI and GDP
Deflator
Consumer Price GDP deflator
Index(CPI)
Focuses on Includes output of the
households’ whole economy
expenditure
Includes imported Excludes imported
goods goods
Goods and services in Goods and services in
the basket are the basket are
updated every few updated every year
years