15.

1 Definition of Gross Domestic Product

‧ GDP is the total market value of final goods and services produced by all resident
producing units of a country or an economic territory in a given period, irrespective
of the nationality of the producers.
‧ Market value
＊ As different goods and services cannot be added up directly, their market values
are added up to calculate the total output.
＊ Goods and services provided by the government, such as public health and
education, are included in GDP at government’s cost of providing them instead
of market value.
‧ Final goods and services
Year Paper / Question
＊ In order to avoid double counting, it does not
2008 HKCEE II / Q28
include the value of intermediate products
2008 HKCEE I / Q9(a)
separately, as the value of intermediate
products has already been included in the 2008 HKCEE I / Q11(d)
value of final goods. 2007 HKCEE II / Q27
‧ Production within a country or an economic 2007 HKCEE I / Q10(a)
territory 2006 HKCEE II / Q25
＊ The word “domestic” in GDP implies that 2005 HKCEE II / Q26
only the value of output of all resident 2005 HKCEE II / Q30
producing units in a country or an economy
2004 HKCEE II / Q26
is included.
2004 HKCEE I / Q10(b)
2003 HKCEE I / Q9(b)(i)
2003 HKCEE I / Q11(a)
2002 HKCEE II / Q25
2002 HKCEE II / Q49
2001 HKCEE II / Q50
2001 HKCEE I / Q6
2000 HKCEE II / Q33
2000 HKCEE I / Q9(b)(ii)
2000 HKCEE I / Q10(b)(iii)

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‧ A given period
＊ Only production which takes place within a given period is included.
‧ Resident producing units
＊ It refers to the production units that maintain their centre of economic interest in
an economic territory, irrespective of their nationalities. The units can be
individuals or organisations.
‧ Economic territory
＊ The “economic territory” of a country or territory refers to the geographic
territory administered by its government, within which persons, goods and
capital circulate freely.
‧ GDP and the circular flow of expenditure and income

＊ The households offer factors of production,

Year Paper / Question
i.e. land, labour, capital and entrepreneurship,
2003 HKCEE II / Q25
to the firms in the factor market. The firms
make use of these inputs to produce goods 2002 HKCEE II / Q24
and services, which are sold to the households in the product market.

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 ＊ On the other hand, the households receive income, such as rent, wage, interest
and profit, from the firms in the factor market for the factors of production they
provide. At the same time, the firms earn revenue from selling goods and
services, which are consumed by the households in the product market.
＊ Therefore, according to the circular flow diagram, total income, total
expenditure and total output are theoretically the same.

15.2 GDP Calculation

‧ Three approaches can be used to calculate GDP, namely production approach (or
value added approach), expenditure approach and income approach.

15.2.1 Production Approach (Value Added Approach)

‧ When using the production approach to calculate Year Paper / Question

GDP, we have to find the total value added of the
2005 HKCEE II / Q28
resident producing units of a country or an
2004 HKCEE II / Q27
economy.
2002 HKCEE II / Q26
‧ In practice, it is difficult to tell whether an output
is a final product or an intermediate product. 2001 HKCEE I / Q11(a)(i)
Therefore, the value added approach is used. 2000 HKCEE II / Q34

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15.2.2 Expenditure Approach

‧ Under expenditure approach, GDP is calculated Year Paper / Question

using the following equation:
2009 HKCEE I / Q9(c)
2009 HKCEE II / Q28
2008 HKCEE II / Q26
2007 HKALE 2B / Q2(a)
‧ Private consumption expenditure (C)
2007 HKALE 2B / Q2(b)
＊ Private consumption expenditure refers to the
2004 HKCEE II / Q28
consumption expenditures by households on
currently produced final goods and services. 2004 HKCEE II / Q30

‧ Gross investment (I) 2004 HKCEE I / Q10(c)

＊ Gross investment refers to the expenditures 2001 HKCEE I / Q11(a)(ii)

made by firms on final goods and services, mainly on capital goods.
＊ The amount of gross investment is the sum of gross domestic fixed capital
formation and changes in inventories.
＊ Gross domestic fixed capital formation refers to the expenditure on purchase of
new capital goods. It is the gross additions to fixed assets, which can increase
the production capacity of firms.
＊ Gross domestic fixed capital formation is equal to net domestic fixed capital
formation plus depreciation.
＊ Changes in inventories refer to the difference between the value of production
and sales.
＊ Changes in inventories are the result of the intended (planned) inventory and
unintended (unplanned) inventory.
＊ Mathematically, the calculation of gross investment can be summarised by the
following equations:

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‧ Government consumption expenditure (G)
＊ Government consumption expenditure includes the government purchases of
goods and services and the payments made to government employees.
＊ However, expenditures related to transfer payments, such as public assistance
and unemployment benefits, are not included because these do not involve any
production of goods or services.
‧ Net exports of goods and services (NX) Year Paper / Question
＊ Net exports of goods and services refer to the 2009 HKCEE I / Q10(a)
difference between the value of total exports 2008 HKCEE II / Q48
(X) and the value of total imports (M) of
2004 HKCEE II / Q29
goods and services.
2003 HKCEE II / Q26
2001 HKCEE II / Q28

＊ The total exports of goods and services are composed of domestic exports and
re-exports.
＊ The value of total exports of goods and services (X) is counted in GDP because
the goods and services are produced by the resident producing units of the
economy.
＊ The value of total imports of goods and services (M) is deducted from GDP
because their values have been included in C, I, G and X but these goods and
services are not produced by the resident producing units of the economy.

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15.2.3 Income Approach

‧ The income approach measures GDP by summing up the income that firms pay
households for factors of production.
‧ GDP at market prices and GDP at factor cost

‧ In many circumstances, the total income received by the factor owners may not be
equal to the total expenditure on all final goods and services. The reasons include:
＊ Indirect taxes levied by the government increase the market prices of goods and
services. Thus, the amount paid by the
Year Paper / Question
consumers (market prices), i.e. GDP at
market prices, is higher than the amount 2009 HKCEE II / Q27
received by the owners of the factors of 2007 HKCEE II / Q28
production (factor cost). 2007 HKCEE II / Q29
＊ Subsidies given by the government decrease 2006 HKCEE II / Q28
the market prices of goods and services. 2006 HKCEE I / Q5
Thus, the amount paid by the consumers
2005 HKCEE II / Q27
(market prices), i.e. GDP at market prices, is
2005 HKCEE I / Q11(a)
lower than the amount received by the
owners of the factors of production (factor 2003 HKCEE II / Q27
cost). 2002 HKCEE I / Q11(a)
2000 HKCEE II / Q35

15.3 Nominal GDP versus Real GDP

‧ Nominal GDP refers to the GDP measured in terms of the prices in the current year. It
is also called GDP at current market prices.
‧ Real GDP refers to the GDP measured in terms of the prices in the base year. It is
also called GDP at constant market prices.

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‧ Real GDP is a better measure of the growth of output than nominal GDP because it
removes the effects of changes in prices.
‧ Mathematically, the relationship between real GDP and nominal GDP can be
described by the following formula:

‧ The relationship between real GDP and nominal

Year Paper / Question
GDP is as follows:
2009 HKCEE II / Q29
2009 HKCEE I / Q7(a)
2005 HKCEE II / Q29

‧ When nominal GDP increases, the real GDP may 2004 HKCEE I / Q5
increase, decrease or remain constant, depending 2003 HKCEE II / Q29
on the changes in prices. 2002 HKCEE II / Q30

15.4 Growth Rate of Real GDP and Per Capita GDP

‧ The growth rate of real GDP is:

‧ When we compare two or more economies with

Year Paper / Question
different population sizes, per capita GDP is
2008 HKALE 2A / Q30
commonly used:
2003 HKCEE I / Q5
2002 HKALE 2A / Q2
2000 HKCEE II / Q36

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