International Workshop Shenzhen China April 2011 GDP Roundtable

International Workshop Shenzhen, China April 2011 GDP Roundtable Discussions Some sharing by : Frederick W H HO 1

National Accounting • Production : inputs and outputs • Distribution of income arising from production (to: different producers, to: employees and entrepreneurs/investors) • The formation of capital – basis of future production • External relationship -- flow (inflow and outflow) of goods and services across boundaries (of territories/countries) -- flow of income and funds • Etc. 2

National Accounting • Production: “Value added” of the different industries: reflecting the relative contributions of the different industries (“economic sectors”) -- agriculture, fisheries, …manufacturing, … construction, . . . distributive trade, …, services. . ) to the economy GDP = total of the “value added” of the different industries = Contributions attributed to the DOMESTIC ECONOMY (many of the goods and services produced by the domestic economy have direct and indirect “imported contents”) 3

GDP by Production Approach and Income Approach Input (1) ： Intermediate consumption Producing (A) Value of goods and services consumed Gross output (B) Value of products Unit Input (3): Capital and entrepreneurship Input (2): Labour (C) Return to labour: “Compensation of employees” (D) Return to capital and entrepreneurship: “Gross operating surplus” A+C+D=B Value added = ( B ) –( A ) [production approach] = (C) +(D) (4) [income approach] Physical flow Value flow (i. e. money or equivalent) Value added of an industry = Sum of value added of all producing units in the industry GDP (at factor cost) = Sum of value added of all industries 4

• Based on the income approach, we can see the situation of income earned by employees vs income earned by entrepreneurs /investors 5

Uses of the Gross Output (Goods and services produced by Producing Units) intermediate use : outputs (goods and services) used by some other industries final use (“final demand”) : outputs going to > households > government—for the production of government services > capital formation > export 6

GDP by Final demand Approach Consider only goods and services for “Final” Use C = Private consumption expenditure C G = Government consumption expenditure M G X X = Exports of goods and services I GDP = C + G + I + X i. e. Sum of the Final Uses LESS the Imported Contents I = Investment (Gross domestic fixed capital formation plus Changes in inventories) M [ We are unable to remove the imported contents at the various stages of domestic production ] M = Imports of goods and services 7

GDP by Final Demand Approach • Under this approach, we work backwards from the use of the goods (and services) produced to arrive at the GDP. • We add up the values of all the final goods and services USED and then remove the imported contents. • We do the REMOVAL of IMPORTED CONTENTS at one go in the end as we can ONLY do so. 8

In GDP by Final Demand approach: We only look at the products and services for final use; otherwise there will be a lot of double counting • From cotton to yarn ; and yarn to cloth; and cloth to shirt --- • the yarn, if used by the cloth factory, is “intermediate goods”; and the cloth, if used by a local shirt factory, is “intermediate goods” too. IN NOT counting the intermediate goods, we will not incur double counting • If the sales of spinning factory, weaving factory and garment factory were added together, the value of cotton would have been counted several times. 9

GDP by Final Demand approach • For a piece of final product (or service), -- there are usually both direct and indirect “imported contents” --the value consist of “value added” by several industries • Consider the shirt purchased by a local consumer -- cotton is spun into yarn, the yarn is woven into cloth, and the cloth is finally sewn into a shirt. Thus for the shirt factory, it has not imported the cloth, but indirectly it has imported cotton -- the plastic button may be made locally, but the plastic material is imported --electricity is used in the several manufacturing processes, and also by the retailer who sells the shirt to the consumer. Electricity is generated by oil, which is imported. Oil is thus a common item of imported content in many final goods (and services). --also, many producers have to use transport services (transporting the raw materials and finished goods) and vehicles use oil as fuel. 10

GDP by Final Demand Approach C C = Private consumption expenditure M G X I GDP = C + G + I + X M 1632 = 1006 + 142 + 367 + 3167 3047 G = Government consumption expenditure I = Investment (Gross domestic fixed capital formation plus Changes in inventories) X = Exports of goods and services M = Imports of goods and services >> For C, G, I, X only “FINAL goods and services” are counted >> The above are 2009 figures in HK$ billion. 11

Total Final Demand Total supply (4680) GDP + M 1632 + 3047 = = = Total Final Demand (4680) C + G 1006 + 142 + I + 367 + X + 3167 Ratio to GDP An indication of the relative economic significance of that economic aggregate to the economy - Ratio of X to GDP is 193% - X has both domestic contents and imported contents. It is not exactly a “component” of GDP. Hence it is totally possible for the ratio to be bigger than 100%. And, we should not say that “the share of exports in GDP is xx %”) 12

Tourism • Tourists visit a territory and spend money on hotels, restaurants, shopping, transportations and tours. • Considerable imported contents are in the goods and services consumed. • Also, while we always talk about the “tourism industry”, it is not such a clear-cut industry. Some retailers and restaurants depend much on tourists’ expenditure but others may not. • Again, it is more appropriate to refer to “ the ratio of tourist expenditure to GDP “ rather than “the share of tourist expenditure in GDP” 13

Government Consumption • A way of looking at Government Consumption Expenditure : The government produces services which are used ”collectively” by the community, or, conceptually, we consider the services are consumed by the government on behalf of all the citizens. • AND To distinguish PRODUCTION and CONSUMPTION of government services from their FINANCING -The government does not produce and market its services. It does not make a “profit” even if there are “surpluses” in the Budget. Government gets money from taxes and other receipts from the citizens. It pays wages and buys materials needed in the course of performing its functions. 14

Value added of Government : Government Consumption Expenditure Input (1) ： Intermediate consumption e. g. electricity, stationery, rental services Gross Government output(4) Consumed by gov’t on behalf of all (Producer of gov’t services) Input (2): Labour Value added = ( 4) - (1) residents Input (3): X Capital and entrepreneurship Physical flow = (2) +(3) =(2) + 0 = (2) [[ Gross Operating Surplus is taken as zero]] A method of “ Valuation of ‘Output’ by ‘Sum of Inputs’ is used, since the output is not a marketable commodity { (4) = (1)+(2)+(3) } 15

National Accounting in an Integrated Economic Statistics Programme National Accounting is -the foundation and the core component of an Integrated Economic Statistics Programme for the National Statistical System It enables an overall view of the entire economy. It also facilitates improvement in the coherence of the National Statistical System – checking of consistency across different sectors of economic statistics, coordination of various statistical standards 16

Uses of national accounting statistics • Economic Analysis – (a) Enabling macro-economic and micro-economic analysis – (b) Monitoring the performance of the overall economy and the various sectors 17

Uses of national accounting statistics • Macro-level policy analysis, formulation and decision – – – (a) Sustaining the competitiveness of successful industries (b) Identifying and assisting new industries (c) Demand supply balances (d) Balance between consumption and investment (e) Reliance on imports in production and consumption and capital formation 18

Uses of national accounting statistics • Action programme planning for sectoral developments – (a) tracking the developments in specific economic sectors and determining action strategies for their developments – (b) sectoral productivity studies 19

Uses of national accounting statistics • Business – – (a) identify profitable lines of business (b) discover appropriate mix of products (c) find optimum cost structure (d) make investment decisions 20