GNP Definition:

Income earned by the resident of an economy from engaging in various economic

activities in a specific period.

GDP Definition:
Total value of production of all resident producing units of an economy in a specific
period.

Resident
1. People who have stayed in the economic territory of an economy for at least one
year/ or intended to stay (irrespective of nationality).
2. Organisations that operate in the economy
e.g. branch of multinational bank (HSBC)

Income inflows from abroad

- Residents earn income from non-resident.
E.g. Hong Kong people earn rental income from the UK.
Income outflows to abroad
- Non-resident earn income from residents.
E.g. Hong Kong company employ UK architects.

Examples:
1. Investment income: dividend, interest from bank deposit, rental income
2. Income of employees: salaries & cash

GNP = GDP + Income inflows from abroad - Income outflows to abroad

General price level (reflected by GDP deflator)

- Price of goods generally transacted in market
- Include both producer goods and consumer goods

CPI
- Price of consumer goods generally transacted in market
- Only include consumer goods
- CPI (A) households in the low expenditure range
- CPI (B) households in the middle expenditure range
- CPI (C) households in the high expenditure range
- Composite CPI covers all expenditure range
Inflation: persistent increase in the general price level
Deflation: persistent decrease in the general price level
Main point:
1. Persistent change instead of once-and-for-all change
E.g. Cash handout would not cause inflation.
2. Reflect general price level instead of an individual good
The price of one particular might drop during inflation.

Nominal GDP
- GDP measured at current market price
- Price level 100 (2019) ->125 (2020)
- Quantity produced unchanged (10)
- Nominal GDP increase from 100*10=1000 to 125*10=1250
Real GDP
- GDP measured at market price of a particular year
- Price level 100 (2019)-> 100 (2019)
- Quantity produced unchanged (10)
- Nominal GDP does not change
Limitations of GDP
1. Population size (overestimate LS) e.g. China (per-capita GDP is preferred)
2. Income distribution (overestimate LS)
3. Working hours (overestimate LS)
4. Composition of goods (overestimate LS)
5. Impact of price level (overestimate LS) Real GDP is preferred
6. Undesirable effects of production (overestimate LS)
7. Uncompensated services (underestimate LS)
8. Inaccurate estimation (underestimate LS) e.g. unreported/ illegal production
New GDP− Old GDP
Growth rate of GDP (real/ nominal) = *100%
Old GDP

𝐆𝐃𝐏
Per capita GDP (real/ nominal) = 𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧

GDP deflator
- Indicate change in price level (Inflation/ deflation)
Nominal GDP
- *100%
Real GDP

CPI vs GDP deflator

- CPI reflect cost of living (only consumer goods)
- GDP deflator reflect general price level (both consumer & producer goods)