Measurement of Economic Performance

GDP

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within an economy in a given period.

Three approaches

Expenditure approach:

$GDP = C + I + G + (X - M)$

$C$ = private consumption expenditure, $I$ = investment expenditure (gross domestic fixed capital formation + changes in inventories), $G$ = government consumption expenditure, $X - M$ = exports of goods and services − imports of goods and services.

Income approach: the sum of factor incomes (wages, rent, interest, profit) gives GDP at factor cost. Adding indirect taxes net of subsidies gives GDP at market prices; depreciation must also be included for gross figures.

Value-added (production) approach: the sum of the value added at each stage of production. This avoids double counting.

Stage	Sales	Value added
Farmer sells wheat	$100	$100
Miller sells flour	$250	$150
Baker sells bread	$600	$350
Total		$600

Included and excluded

Not included in GDP:

• Second-hand goods (produced in an earlier period). The agent's commission for selling them is included.
• Transfer payments such as CSSA and unemployment benefits.
• Financial transactions such as buying shares (the broker's commission is included).
• Intermediate goods (already counted in the final good).
• Non-market activities such as housework done by family members.

GNI

$GNI = GDP + \text{net external factor income flow}$

GDP measures production within Hong Kong; Gross National Income (GNI) measures the income of Hong Kong residents, wherever it is earned.

Nominal and real GDP

• Nominal GDP: valued at current market prices.
• Real GDP: valued at constant (base-year) prices, so it changes only when output changes.

$\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP deflator}} \times 100$

$\text{Per capita real GDP} = \frac{\text{Real GDP}}{\text{Population}}$

Limitations of GDP as a measure of welfare

Per capita real GDP does not reflect: non-market activities, the underground economy, leisure, income distribution, the composition of output, and external costs such as pollution.