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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

Multiple Choice Questions |!|EM41001|!| Which of the following statements about GDP is CORRECT? A. B. C. D. Under the income approach, GDP will be equal to the total income of all local workers. Using the value added approach to calculate GDP can avoid the problem of double counting. Every transaction is recorded at cost. If the government imposes indirect taxes, GDP at market prices will be smaller than GDP at factor cost.

## B In reality, it is difficult to tell whether an output is a final product or an intermediate product. By using the value added approach, GDP is equal to the sum of the value added of all products at different stages of production. The problem of double counting can therefore be avoided. Option A is incorrect. Under the income approach, GDP is measured by summing up the income that firms pay households for factors of production. Option C is incorrect. GDP measures the total market value of final goods and services of an economy. Only goods and services provided by the government are included in GDP at governments cost of providing them. Option D is incorrect. GDP at market prices = GDP at factor cost + Indirect taxes Subsidies Without the data about subsidies, we do not know if GDP at market prices is smaller than GDP at factor cost or not. ##

|!|EM41002|!| Which of the following should be included in Hong Kongs GDP for 2010? A. B. C. D. the old age allowance paid by the government in 2010 the value of a computer produced in 2009 but sold in 2010 the value of a gift received by a Hong Kong resident from a Mainland resident in 2010 the salary of a salesperson from working in a shop selling second-hand goods in 2010

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## D The salary reflects the value of the service provided by the salesperson in 2010. Options A and C are incorrect. They do not involve any production. Option B is incorrect. The computer is not produced in 2010, so it is not included in the GDP for 2010. ##

|!|EM41003|!| Which of the following should NOT be included in the calculation of the gross domestic product of Hong Kong? A. B. C. D. the income earned by a Filipino maid from providing services to her Hong Kong employer the expense paid by a Japanese businessman on a suit he bought in Hong Kong the money earned by a housewife from speculation in the stock market the commission received by a salesperson from promoting broadband service

## C This sum of money does not involve any production. Options A, B and D are incorrect. They are all market value of final goods and services produced by the resident producing units of Hong Kong, and thus should be included in the calculation of the gross domestic product of Hong Kong. ##

|!|EM41004|!| The following descriptions about GDP are correct EXCEPT that A. B. C. D. changes in inventories are included. GDP at market prices is always greater than GDP at factor cost. unemployment assistance is not included in the GDP calculation. GDP may overestimate an economys living standard.

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## B GDP at market prices = GDP at factor cost + Indirect taxes Subsidies When subsidies are greater than indirect taxes, GDP at market prices will be smaller than GDP at factor cost. Option A is correct. Changes in inventories are included in the gross investment, which is a component of GDP under the expenditure approach. Option C is correct. Unemployment assistant does not involve any production, so it is not included in GDP. Option D is correct. For example, if the growth rate of population size is higher than the growth rate of GDP, per capita GDP decreases. The economys living standard is therefore overestimated. ##

|!|EM41005|!| Which of the following should NOT be included in the calculation of GDP? (1) income of unlicensed hawkers (2) profit earned from selling illegal drugs (3) money received from smuggling chickens from the Mainland

A. B. C. D.

(1) and (2) only (1) and (3) only (1), (2) and (3) None of the above.

## D Although the above production activities are illegal, theoretically, their values should be included in GDP. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41006|!| Which of the following is/are included in the calculation of the gross domestic product of Hong Kong? (1) an increase in the price of shares of a commercial bank in Hong Kong (2) a cake baked for celebration of a friends birthday (3) the estimated rental value of an owner-occupied property in Hong Kong

A. B. C. D.

(1) only (3) only (2) and (3) only None of the above.

## B The owner-occupied property is viewed as self-rented and the estimated rental value is included in the GDP of Hong Kong. (1) does not involve any production of goods and services, while (2) does not have market value, so they are not included in the calculation of GDP. ##

|!|EM41007|!| Which of the following should NOT be included in the GDP calculation? A. B. C. D. the value of an increase in the inventory of paper held by a publisher the market value of a new flat purchased by Mr. Lee $10,000 worth of newly-issued shares sold on the stock market governments expenditure on infrastructure

## C The value of shares is not included because the transaction only represents a transfer of wealth and no production is involved. Options A, B and D are incorrect. They involve current production and thus should be included in the GDP calculation. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41008|!| (revised) Which of the following items is included in the calculation of Hong Kongs GDP? A. B. C. D. a scholarship received by a university student prizes from the Mark Six government subsidies to tertiary education the value of housework done by a housewife

## C This is the amount paid for the services provided by universities. Options A and B are incorrect. They do not involve any production. Option D is incorrect. The housework does not have market value as the production has not gone through the market. ##

|!|EM41009|!| Which of the following should be included in the calculation of Hong Kongs GDP? (1) the revenue of a subsidiary of an American firm in Hong Kong (2) the sales revenue of a shop in Mongkok operated by a Canadian (3) the revenue of a gift shop in the UK that is run by a Hong Kong resident

A. B. C. D.

(1) only (3) only (1) and (2) only (1) and (3) only

## C For (1) and (2), the subsidiary and the shop are resident producing units of Hong Kong. Their revenue should be included in Hong Kongs GDP. (3) is incorrect. The shop is a resident producing unit of the UK. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41010|!| (revised) Some supermarkets offer free delivery service to customers who have purchased above specified amount. Customers that do not spend enough can also order the delivery service, but a charge is involved. The value of the free delivery service A. B. C. D. is included in the GDP because it is a service provided by a resident producing unit. is included in the GDP because the delivery service is enjoyed by the local residents. is not included in the GDP because the problem of double counting will arise. is not included in the GDP because it is free of charge.

## A ##

|!|EM41011|!| Firms usually put lots of resources into advertisements to promote their new products. The money spent on advertising is included in GDP calculation because A. B. C. D. it is regarded as an expenditure of firms. advertisements are final services. there are corresponding production activities by resident producing units. it increases the inventories of the companies.

## C ##

|!|EM41012|!| Money won in soccer betting is A. B. C. D. included in GDP, as it is a market transaction. included in GDP, as it is a return on investment. not included in GDP, as it is a transfer of wealth. not included in GDP, as it is illegal.

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## C The money does not involve any production. Option D is incorrect. Theoretically, the value of illegal transactions should be included in GDP calculation. ##

|!|EM41013|!| Government expenditure on the Comprehensive Social Security Assistance (CSSA) to people in need is A. B. C. D. included in the GDP because it is a kind of government expenditure. included in the GDP because it is spent by people on basic necessities. excluded from the GDP because the money may not be spent within a given period. excluded from the GDP because no corresponding production is involved.

## D The expenditure is a kind of transfer payment. It does not involve any production of goods and services. ##

|!|EM41014|!| ABC Company was listed in 2005. In June 2008, Paul sold out all of ABC Companys shares that he held and earned a huge profit. The profit is A. B. C. D. excluded from the GDP for 2008 because the shares are not issued in 2008. excluded from the GDP for 2008 because this is a transfer of wealth only. included in the GDP for 2008 because the profit is earned in 2008. included in the GDP for 2008 because it is an income.

## B Transaction of shares is excluded because it is only a transfer of wealth and does not involve any production. It should not be counted in the GDP. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41015|!| A jewelry producer produced $38 million of jewelry in 2007. Unfortunately, a diamond ring worth $2 million was stolen. The insurance company then gave a reimbursement of $1.2 million. How would the GDP for 2007 be affected by the above events? A. B. C. D. The GDP for 2007 would increase by $36 million. The GDP for 2007 would increase by $37.2 million. The GDP for 2007 would increase by $38 million. The GDP for 2007 would increase by $39.2 million.

## C The $38 million of jewelry is counted in the GDP. The $2 million diamond ring being stolen and the reimbursement given by the insurance company would not affect the GDP for 2007 because they represented transfers of wealth only. ##

|!|EM41016|!| Which of the following is NOT a resident producing unit of Hong Kong? A. B. C. D. a Hong Kong resident who has been working in Shenzhen for 3 years a Hong Kong resident who has employed a Filipino domestic helper for 5 years a restaurant in Tsim Sha Tsui owned by a Thai a bookstore that has opened in Kowloon City

## A The residents centre of economic interest is in Shenzhen, not in Hong Kong. Thus, he is not a resident producing unit of Hong Kong. Options B, C and D are incorrect. The Hong Kong residents, the restaurants and the bookstores centre of economic interest is maintained in Hong Kong. They are thus resident producing units of Hong Kong. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41017|!| Which of the following items MUST be an intermediate product? A. B. C. D. a television a computer a washing machine None of the above.

## D All the goods above can be final products or intermediate products, which depend on how people use them. ##

|!|EM41018|!| Which of the following is the LEAST likely to be an intermediate product? A. B. C. D. a piece of cloth bought by a fashion designer for her customer an ice-cream bought by a girl from a convenience store a magazine bought by a hairstylist for his salon a bottle of milk bought by a caf owner for his caf

## B ##

|!|EM41019|!| A housing estate was built in 2001. In 2007, Mr. Chan bought one of the flats secondhand, which cost him $1.3 million. He also used $0.3 million for renovation. The contribution to the GDP for 2007 would be A. B. C. D. $1.6 million. $1.3 million. $1 million. $0.3 million.

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## D The value of the second-hand flat should not be counted in the GDP for 2007 because it is not involved in the production of the current period. However, the renovation is the production in 2007 and it should be counted in the GDP for 2007. ##

|!|EM41020|!| In 2009, Alex bought a second-hand wallet which cost $1,500. However, he lost the wallet later in the same year. What is the effect of the above events to the GDP for 2009? A. B. C. D. The GDP would increase by $1,500 because the $1,500 was consumption expenditure. The GDP would remain unchanged because Alex lost his wallet. The GDP would remain unchanged because the wallet was a second-hand good. None of the above.

## C The value of a second-hand good is not counted in the GDP for 2009, as its value was counted in the GDP when it was sold for the first time. The loss of the wallet did not affect the GDP for 2009. ##

|!|EM41021|!| In 2008, Mr. Chan bought an antique at an auction for $1 million. He sold it for $1.8 million later in the same year. GDP for 2008 A. B. C. D. would increase by $1 million. would increase by $1.8 million. would increase by $2.8 million. would not change.

## D Since the antique was not produced in 2008, the revenue from selling or re-selling it should not be counted in the GDP for 2008. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41022|!| During 2008, the demand for dolls increased sharply. The supply of dolls could not meet the demand at that time. Some firms decided to sell the dolls in stock that were produced in 2006. Which of the following statements is CORRECT? A. B. C. D. All the sales revenue would be counted in the GDP for 2008. Only the value of dolls produced in 2008 would be counted in the GDP for 2008. Only the value of dolls produced in 2006 would be counted in the GDP for 2008. None of the sales revenue would be counted in the GDP for 2008.

## B Only the value of production that took place within 2008 would be counted in the GDP for 2008. Option A is incorrect. Part of the sales revenue came from the sale of dolls produced in 2006. This part of sales revenue should not be counted in the GDP for 2008. Option C is incorrect. The value of dolls produced in 2006 has been included in the GDP for 2006. It should not be counted in the GDP for 2008. Option D is incorrect. The sales revenue from selling the dolls produced in 2008 should be included in the GDP for 2008. ##

|!|EM41023|!| The diagram below shows a production chain in an economy in a certain year. Jeans, $750 Local Cloth, Firm B Households $500 Firm A Cloth, $200 Skirts, $300 Foreign Countries

Firm C

Refer to the above production chain. What is the total contribution of firm B and firm C to the GDP of the economy? A. B. C. D. $1,050 $750 $350 $300

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## C Firm Bs contribution: $750 $500 = $250 Firm Cs contribution: $300 $200 = $100 Total contribution of firm B and firm C = $250 + $100 = $350 ##

|!|EM41024|!| The following diagram shows the production chain of ice cream in an economy. US Milk Exporter $360 Ice Cream Manufacturer Local Milk Suppliers $440 $2,500 Ice Cream Retailers $3,200 Foreign Market $2,800 Domestic Market

What is the contribution of the above production chain to the economys GDP? A. B. C. D. $2,800 $5,200 $5,640 $6,000

## C Using the value added approach, the contribution of the above production to GDP = [($2,800 + $3,200) $2,500] + [$2,500 ($360 + $440)] + $440 = $5,640 ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41025|!| The following diagram shows the production chain of handbags in an economy. Raw materials, $230 Handbags Manufacturer Raw materials, $150

USA $240 $360 Retailer $780 Local Consumers Foreign Markets

China

Local Producers

$270 Trading Company

$890

The contribution of the above production chain to the economys GDP is _____________. A. B. C. D. $1,290 $1,440 $1,670 $1,680

## D Using the value added approach, the contribution of the above production chain to GDP = [($780 $360) + ($890 $270)] + [($240 + $360 + $270) ($230 + $150)] + $150 = $1,680 ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41026|!| The following table shows the production chain of toys in an economy. Foreign Raw Material Exporters Local Raw Materials Producers

$600 Toy Manufacturer $550 $2,000 Toy Retailers $3,500 Foreign Market

The value added of toy retailers is . A. B. C. D. $3,500 $1,500 $3,500 $4,050 $1,500 $2,900 $1,500 $3,500

and the total value added of all the production stages is

## C The value added of toy retailers = $3,500 $2,000 = $1,500 Total value added of all the production stages = ($3,500 $2,000) + [$2,000 ($550 + $600)] + $550 = $2,900 ##

|!|EM41027|!| Which of the following is regarded as private consumption expenditure in calculating GDP under the expenditure approach? A. B. C. D. governments expenditure on education a companys expenditure on machinery transfer payments recipients expenditure on education a bakerys expenditure on flour

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## C The expenditure on final goods spent by households is regarded as private consumption expenditure. Option A is incorrect. Governments expenditure on education should be included in government consumption expenditure. Options B and D are incorrect. A companys expenditure on machinery and a bakerys expenditure on flour should be included in gross investment. ##

|!|EM41028|!| Which of the following is/are included in private consumption expenditure in the calculation of GDP? (1) Marys expenditure on purchasing a newly completed flat (2) Peters expenditure on a second-hand car (3) Simons school fee

A. B. C. D.

(1) only (3) only (1) and (2) only (2) and (3) only

## B Simons school fee is regarded as the expenditure on final goods of a household. Therefore, it is included in private consumption expenditure. (1) is incorrect. Marys expenditure for purchasing a newly completed flat is included in gross investment. (2) is incorrect. Peters expenditure on a second-hand car is not included in the GDP of the current year. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41029|!| Which of the following is NOT included in gross domestic fixed capital formation? A. B. C. D. a companys expenditure on machinery a companys expenditure on air-conditioners a companys expenditure on purchasing an office premise a companys expenditure on shares

## D A companys expenditure on shares is considered as a transfer of wealth and does not involve any production. Options A, B and C are incorrect. A companys expenditure on machinery, air-conditioners and purchasing office premise are expenditures on capital goods. Thus, they are included in gross domestic fixed capital formation. ##

|!|EM41030|!| Which of the following is included in gross domestic fixed capital formation? A. B. C. D. Peters expenditure on a television set installed in his bedroom Kittys expenditure on a television set for her restaurant Marys expenditure for hiring a foreign domestic helper Johns expenditure on shares issued by a listed company

## B The television set in Kittys restaurant is a capital good. Therefore, the expenditure on it should be included in gross domestic fixed capital formation. Options A and C are incorrect. Peters expenditure on a television set installed in his bedroom and Marys expenditure on hiring a foreign domestic helper are regarded as the expenditure of households. They should be included in private consumption expenditure. Option D is incorrect. The expenditure on shares is regarded as a transfer of wealth and does not involve any production. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41031|!| Which of the following items should be included in the component of gross investment of a toy factory of the current year? A. B. C. D. the expenditure on shares this year revenue from selling the inventories which were produced last year but sold during this year the inventories which were produced this year but remain unsold the cost of building a new factory plant last year

## C Since the inventories were produced this year, it should be included in the gross investment this year no matter if it has been sold or not. Option A is incorrect. The expenditure on shares is a transfer of wealth and does not involve any production. Options B and D are incorrect. As the inventory and the new factory were produced and constructed last year, the expenditures on them should not be included in the gross investment of the current year. The expenditures were included in the gross investment for last year. ##

|!|EM41032|!| Which of the following expenditures should be included in the gross investment of Hong Kongs GDP? A. B. C. D. the expenditure on unemployment benefits by the government the expenditure on purchasing shares in the stock market by an investor the expenditure on installing air-conditioners in classrooms by a private school the expenditure on purchasing a photocopying machine for personal consumption by a household

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## C The expenditure on installing air-conditioners in classrooms by a private school is an expenditure on purchase of capital goods. The expenditure should be included in the gross investment. Option A is incorrect. The expenditure on unemployment benefit by the government is regarded as transfer payments and should not be included in the GDP. Option B is incorrect. The expenditure on purchasing shares in the stock market by an investor is regarded as a transfer of wealth and does not involve any production. Option D is incorrect. The expenditure on purchasing a photocopying machine for personal consumption by a household is regarded as a households expenditure. Thus, it should be included in private consumption expenditure. ##

|!|EM41033|!| Which of the following is regarded as an export of services of Hong Kong? A. B. C. D. A Hong Kong supplier exports clothes to Japan. A singer with a Hong Kong music company performs a concert in Japan. Hong Kong residents purchase shares in foreign stock markets. The Hong Kong SAR Government donates money to countries that have suffered from earthquake.

## B The production company of the concert in Japan purchased a service from the Hong Kong music company, i.e. the performance of the singer. Therefore, it is an export of services of Hong Kong. Option A is incorrect. Export of clothes by a Hong Kong supplier to Japan is regarded as an export of goods of Hong Kong. Option C is incorrect. Purchase of shares by Hong Kong residents in the foreign stock markets is regarded as a transfer of wealth. This does not involve any production. Option D is incorrect. Donation by the Hong Kong SAR Government to countries that have suffered from earthquake does not involve any production. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41034|!| The GDP of Hong Kong will decrease if A. B. C. D. firms intend to hold more inventories. more Mainland tourists travel to Hong Kong. the government establishes a new department. there is a decrease in the value of re-export of Hong Kong.

## D The fall in re-export leads to a fall in net exports, resulting in a decrease in Hong Kongs GDP. Option A is incorrect. As inventories are the products of the current year, firms intending to hold more inventories would not cause a fall in the GDP. Option B is incorrect. More Mainland tourists travelling to Hong Kong leads to a rise in net exports, resulting in an increase in Hong Kongs GDP. Option C is incorrect. Establishment of a new department by the government leads to a rise in government consumption expenditure, resulting in an increase in Hong Kongs GDP. ##

|!|EM41035|!| Nowadays, many Hong Kong citizens travel abroad during holidays. The spending they do overseas is regarded as A. B. C. D. of Hong Kong.

private consumption expenditure an export of services an import of services an import of goods

## C ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41036|!| The spending of the famous Japanese singer Ayumi Hamasaki on her trip to Hong Kong should be counted in A. B. C. D. of Hong Kong. private consumption expenditure exports of goods and services imports of goods and services gross investment

## B As the spending is on the goods and services produced by the resident producing units of Hong Kong, it is an export of goods and services of Hong Kong. ##

|!|EM41037|!| Which of the following figures must not be negative? A. B. C. D. net exports indirect taxes minus subsidies growth rate of real GDP depreciation

## D Depreciation refers to the reduction in the value of fixed capital after using it for a period of time. Therefore, the value of it cannot be negative. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41038|!| The table below shows the gross domestic product (GDP) data of Country A in a certain year.

Items Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Reduction in inventories Exports of services Imports of services Total exports of goods Re-exports of goods Imports of goods Depreciation

$ million 410 420 120 70 540 320 430 180 500 18

The GDP at market prices is _______________ million. A. B. C. D. $1,012 $1,030 $1,192 $1,210

## B GDP at market prices = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports = ${410 + (120 70) + 420 + [(540 + 430) (320 + 500)]} million = $1,030 million Note that re-exports of goods are included in total exports of goods and depreciation is included in gross domestic fixed capital formation. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41039|!| The table below shows the gross domestic product (GDP) data of an economy in a certain year.

Items Private consumption expenditure Government consumption expenditure Gross investment Decrease in inventories Net exports Indirect taxes less subsidies Depreciation

$ million 200 100 150 70 100 80 60

The GDP at factor cost is ____________ million. A. B. C. D. $400 $470 $480 $620

## B GDP at factor cost = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports Indirect taxes less subsidies = $(200 + 150 + 100 + 100 80) million = $470 million Note that decrease in inventories and depreciation are included in gross investment. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41040|!| The following table shows the gross domestic product (GDP) data of a country in a certain year.

Items Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Changes in inventories Domestic exports of goods Re-exports of goods Imports of goods Exports of services Imports of services Depreciation

$ million 600 200 400 -80 60 340 300 240 460 50

The GDP at market prices is _____________ million. A. B. C. D. $950 $1,000 $1,340 $1,460

## B GDP at market prices = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports = ${600 + (400 80) + 200 + [(60 + 340 + 240) (300 + 460)]} million = $1,000 million Note that depreciation is included in gross domestic fixed capital formation. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41041|!| The following table shows the GDP data of an economy in a certain year.

Items Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Decrease in inventories Domestic exports Re-exports Imports Indirect taxes

$ billion 450 100 380 30 40 80 55 5

The GDP at factor cost is _____________ billion. A. B. C. D. $865 $925 $960 $970

## C GDP at factor cost = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports Indirect taxes = $[450 + (380 30) + 100 + (40 + 80 55) 5] billion = $960 billion ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41042|!| Read the table below and answer the following questions.

Items Private consumption expenditure Government consumption expenditure Net domestic fixed capital formation Changes in inventories Net exports Depreciation Indirect business tax

$ million 560 125 423 65 533 10 76

(a) The GDP at market prices is _____________ million. A. B. C. D. $1,250 $1,716 $1,782 $2,162

(b) The GDP at factor cost is _____________ million. A. B. C. D. $1,640 $1,706 $1,782 $2,086

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) B GDP at market prices = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports = $[560 + (423 + 65 + 10) + 125 + 533] million = $1,716 million (b) A GDP at factor cost = GDP at market prices Indirect business tax = $(1,716 76) million = $1,640 million ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41043|!| Answer the following questions by referring to the table below.

Items Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Net domestic fixed capital formation Changes in inventories Depreciation Net exports Indirect taxes Direct taxes Subsidies

$ billion 220 X 370 Y 80 50 90 40 60 10

(a) What is the value of Y? A. B. C. D. 290 310 320 420

(b) If the GDP at factor cost is $1,090 billion, the value of X is ____________. A. B. C. D. 360 380 400 420

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) C Gross domestic fixed capital formation = Net domestic fixed capital formation + Depreciation Therefore, 370 = Y + 50 and Y = 320. (b) A GDP at factor cost = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports Indirect tax + Subsidies $1,090 billion = $[220 + (370 + 80) + X + 90 40 + 10] billion X = 360 ##

|!|EM41044|!| The following diagram shows the production chain of watches in Country A. The watch factory imports $3,000 worth of raw materials from foreign countries. $7,000 Retailers Consumers

$5,000 $3,000 Watch Factory $2,000 ($250 sales tax inclusive)

Exporters

The contribution of the above production chain to Country As GDP at factor cost is A. B. C. D. $5,750. $6,000. $6,250. $6,750.

## A The contribution of the above production chain to GDP at factor cost = $[(5,000 + 2,000 3,000) + (7,000 5,000) 250] = $5,750 ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41045|!| The following diagram shows the production chain of toys in Country A. The toy manufacturer imports $50,000 worth of raw materials. $70,000 $50,000 Toy Manufacturer Local Consumers $65,000 (after $12,000 of subsidy) Overseas Consumers

The contribution of the toy manufacturer to Country As GDP at factor cost is A. B. C. D. $73,000. $85,000. $97,000. $185,000.

## C The contribution of the toy manufacturer to Country As GDP at factor cost = $(70,000 + 65,000 50,000 + 12,000) = $97,000 ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41046|!| The following diagram shows the production chain of juice in Country A. The producer imports $15,000 worth of bottles and $150,000 worth of fruits. $500,000 Juice Producer $250,000 ($18,000 sales tax inclusive) Local Consumers Overseas Consumers

Bottles: $15,000 Fruits: $150,000

The contribution of the juice producer to Country As GDP at market prices is A. B. C. D. $67,000. $85,000. $567,000. $585,000.

## D The contribution of the juice producer to Country As GDP at market prices = $[(500,000 + 250,000) (15,000 + 150,000)] = $585,000 ##

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|!|EM41047|!| Answer the following questions by referring to the following production chain of corn oil in an economy.

Imported Raw Materials Domestic Raw Materials (a)

$300 Corn Oil Producer $200 $700 Supermarkets $1,200 Consumers

What is the contribution of the above production chain to the economy's GDP at market prices? A. B. C. D. $1,200 $1,100 $1,000 $900

(b) If a direct tax of $100 is charged on the producers, what is the contribution of the above production chain to the economy's GDP at factor cost? A. B. C. D. 1,100 1,000 900 800

## (a) D The contribution of the above production chain to the economy's GDP at market prices = $[(1,200 700) + (700 300 200) + 200] = $900 (b) C Direct tax is not included in the calculation of GDP at factor cost. Therefore, GDP at factor cost equals GDP at market prices, which is $900. ##

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|!|EM41048|!| Refer to the production chain of bread in Country A and answer the question.

$300 $600 of flour Local Importers $500

Country B $900 Bread Manufacturer Retailers $1,100 Foreign Market Domestic Market

$700

Suppose the above production chain has included an indirect tax of $300 that is charged on the retailers and a subsidy of $200 that is given to the bread manufacturer. What is the contribution of the above production chain to Country As GDP at factor cost? A. B. C. D. $900 $1,300 $1,600 $1,700

## C The contribution of the above production chain to Country As GDP at market prices = $[(1,100 + 900 700) + (700 500) + (500 + 300 600)] = $1,700 The contribution of the above production chain to Country As GDP at factor cost = $(1,700 300 + 200) = $1,600 ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41049|!| The following transactions were recorded in an economy in a certain year. 1. An importer imported $500 flour to Hong Kong. 2. The importer sold the flour to a bakery for $700. 3. The bakery sold the bread to consumers for $1,000 (including a tax of $50). What is the contribution of the above transactions to the economys GDP at factor cost? A. B. C. D. $1,700 $1,000 $950 $450

## D The contribution of the above transactions to the economys GDP at factor cost = $[(1,000 700) + (700 500)] $50 = $450 ##

|!|EM41050|!| Suppose the nominal GDP is greater than the real GDP in a certain year. This implies that A. B. C. D. the price level has increased. the real output is increasing at a faster rate than the price level. the real value of output has not increased. the current price level is higher than that of the base year.

## D Real GDP = Nominal GDP (Price index of the base year / Price index of the current year) Since the nominal GDP is higher than the real GDP, the price index of the current year must be higher than the price index of the base year. The current price level is higher than that of the base year. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41051|!| If the real GDP is greater than the nominal GDP, A. B. C. D. population size must have increased. per capita real GDP must be smaller than per capita nominal GDP. the current price index must be lower than that of the base year. the current price index must be higher than that of the base year.

## C Real GDP = Nominal GDP (Price index of the base year / Price index of the current year) As real GDP is greater than nominal GDP, the current price index must be lower than that of the base year. Option A is incorrect. The change in population size cannot be reflected in the real GDP and nominal GDP. Option B is incorrect. Suppose the population size remains unchanged. If the real GDP is greater than the nominal GDP, per capita real GDP must also be greater than per capita nominal GDP. ##

|!|EM41052|!| Suppose the nominal GDP and the price level decrease by 5% and 15% respectively, while the per capita real GDP remains unchanged. This means that the real GDP must have _______________ and population size must have _______________. A. B. C. D. increased decreased decreased increased increased increased decreased decreased

## C Implicit price deflator of GDP = Nominal GDP / Real GDP 100 When the percentage decrease in the price level is larger than the percentage decrease in nominal GDP, real GDP must have increased. If real GDP increases and the per capita real GDP remains unchanged, population size must have increased. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41053|!| Read the table below.

Year 2007 2008

GDP at current market prices ($ billion) 2,205 Z

Price index 105 110

Suppose the price index for the base year is 100. If the growth rate of real GDP between 2007 and 2008 is 8%, the value of Z is ____________. A. B. C. D. 2,273.2 2,381.4 2,494.8 2,750.5

## C Real GDP = Nominal GDP (Price index of the base year / Price index of the current year) Real GDP in 2007 = $2,205 billion (100 / 105) = $2,100 billion Real GDP in 2008 = $2,100 billion 1.08 = $2,268 billion GDP at current market prices in 2008 = $2,268 billion (110 / 100) = $2,494.8 billion ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41054|!| Suppose a closed economy produces garments and vegetables only. Its output in year X and year X + 1 are as follows:

Year X X+1

Garments Total value ($) Unit price ($) 4,000 20 3,000 12

Vegetables Total value ($) Unit price ($) 5,000 5 3,600 3

From year X to year X + 1, the real GDP of this economy A. B. C. D. has increased, because the price level has decreased. has increased, because output of both goods has increased. has decreased, because total revenue has decreased. has decreased, because the price level has decreased sharply.

## B In year X, the economy has produced 200 ($4,000 / 20) units of garments and 1,000 ($5,000 / 5) units of vegetables. In year X + 1, the economy has produced 250 ($3,000 / 12) units of garments and 1,200 ($3,600 / 3) units of vegetables. Real GDP only concerns the quantity of goods and services produced. From year X to year X + 1, both the output of garments and vegetables increased, so the real GDP also increased. ##

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|!|EM41055|!| Read the following table.

Year 1 2

Real GDP ($ billion) 2,000 2,500

Population (million) 3 2.8

Price index 100 120

According to the information above, we can conclude that from year 1 to year 2, A. B. C. D. the per capita real GDP has decreased. the nominal GDP has increased. the level of unemployment has fallen. the price level has decreased.

## B Both real GDP and the price level increase, so the nominal GDP increases. Option A is incorrect. As real GDP has increased while population has decreased, per capita real GDP has increased from year 1 to year 2. Option C is incorrect. The information above cannot reflect changes in the level of unemployment. Option D is incorrect. The price index has increased from year 1 to year 2, which implies that the price level has increased. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41056|!| The following table shows the GDP data of an economy in a certain year.

Change in real GDP Change in nominal GDP Change in population size

+5.3% +4.8% +5.1%

According to the information above, we can conclude that in that year, the price level has ____________ and the per capita real GDP has ____________. A. B. C. D. increased increased decreased increased increased decreased decreased decreased

## B As the increase in real GDP (5.3%) is larger than the increase in nominal GDP (4.8%), the price level must have decreased. As the increase in population size (5.1%) is smaller than the increase in real GDP (5.3%), per capita real GDP must have increased. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41057|!| The following table shows the GDP at market prices and the implicit price deflator of GDP in 2008 and 2009 respectively.

Year 2008 2009

GDP at market prices ($ billion) 4,410 5,130

Implicit price deflator of GDP 105 108

The growth rate of real GDP between 2008 and 2009 is A. B. C. D. 2.9%. 13.1%. 16.3%. 19.2%.

## B Implicit price deflator of GDP = (Nominal GDP / Real GDP) 100 105 = $4,410 billion / Real GDP of 2008 100 Real GDP of 2008 = $4,200 billion 108 = $5,130 billion / Real GDP of 2009 100 Real GDP of 2009 = $4,750 billion Growth rate of real GDP = (4,750 4,200) / 4,200 100% = 13.1% ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41058|!| Study the following table.

Nominal GDP ($ million) Population (million)

2005 564,980 5

2006 512,090 4

The growth rate of per capita nominal GDP between 2005 and 2006 was A. B. C. D. -13.3%. -11.7%. 11.7%. 13.3%.

## D Per capita nominal GDP = Nominal GDP / Population size Growth rate of per capita nominal GDP = [(512,090 / 4 564,980 / 5) / (564,980 / 5)] 100% = 13.3% ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41059|!| The table below shows the GDP data of Country A.

Growth rate in real GDP Growth rate in nominal GDP Growth rate in population size

-20% +30% -10%

Which of the following statements is/are CORRECT? (1) The price level must have increased. (2) The per capita nominal GDP must have decreased. (3) The per capita real GDP must have decreased.

A. B. C. D.

(1) only (1) and (3) only (2) and (3) only (1), (2) and (3)

## B (1) is correct. Implicit price deflator of GDP = (Nominal GDP / Real GDP) 100 As the nominal GDP increased (+30%) while the real GDP decreased (-20%), the price level must have increased. (3) is correct. Per capita real GDP = Real GDP of an economy / Population size As the percentage decrease in real GDP (-20%) is greater than the percentage decrease in population size (-10%), the per capita real GDP must have decreased. (2) is incorrect. As the nominal GDP increased (+30%) while population size decreased (-10%), the per capita nominal GDP must have increased. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EM41060|!| Which of the following statements is CORRECT? A. B. C. D. An increase in per capita nominal GDP means an increase in the nominal GDP. The GDP at constant market prices removes the effects of changes in prices. A decrease in the price level must be followed by an increase in real GDP. The GDP at current market prices refers to the GDP measured in terms of the prices in the base year.

## B GDP at constant market prices refers to the GDP measured in terms of the prices in the base year. It shows the real output. The effects of changes in prices are removed. Option A is incorrect. We need to know the population size in order to derive the nominal GDP from the per capita nominal GDP. Option C is incorrect. Real GDP refers to the GDP measured in terms of the prices in the base year. If the price level decreases while the real output remains unchanged, real GDP will not change. Option D is incorrect. GDP at current market prices refers to the GDP measured in terms of the prices in the current year. ##

|!|EM41061|!| Suppose that compared to last year, Country Xs nominal GDP of this year has increased by 2.8%, while its real GDP has increased by 1%. This implies that A. B. C. D. the unemployment rate for this year has decreased. the indirect taxes for this year have decreased. the price level for this year has increased. the size of the population for this year has increased.

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## C Implicit price deflator of GDP = (Nominal GDP / Real GDP) 100 If the percentage increase in the nominal GDP is larger than the percentage increase in the real GDP, this implies that the price level has increased. Options A, B and D are incorrect. Changes in the unemployment rate, the indirect taxes and the size of the population are not reflected in the nominal GDP and real GDP. ##

|!|EM41062|!| Which of the following statements about GDP is CORRECT? A. B. C. D. If nominal GDP increases at a higher rate than the price level, real GDP will increase. An increase in real GDP implies an increase in per capita real GDP. An increase in nominal GDP implies an increase in the real GDP. Per capita nominal GDP must be smaller than per capita real GDP.

## A Implicit price deflator of GDP = Nominal GDP / Real GDP 100 If the increase in nominal GDP is larger than the increase in the price level, real GDP will increase. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

Short Questions |!|ES41001|!| (a) What is gross domestic product (GDP)? (2 marks) (2 marks)

(b) What are resident producing units?

## (a) 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. (2 marks)

(b) Resident producing units refer 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. ## (2 marks)

|!|ES41002|!| (a) Define nominal GDP and real GDP. (4 marks)

(b) Under what condition would the real GDP equal to the nominal GDP in a certain year? (2 marks)

## (a) 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. (2 marks)

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. (2 marks)

(b) When the price index of the base year is equal to the price index of the current year, the real GDP would be equal to the nominal GDP. ## (2 marks)

|!|ES41003|!| (revised) Mr. Chan is the owner of a coffee shop operated in Hong Kong. The coffee and cakes sold are made in the shop. Explain whether the following items are included in Hong Kongs GDP. (a) unsold ground coffee that was produced at the end of the year (2 marks) (2 marks) (2 marks)

(b) the capital gains from the increase in the prices of shares held by Mr. Chan (c) the cake taken from the coffee shop by Mr. Chan to his daughter as a birthday gift

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) It is included in the GDP because the ground coffee is produced in the current year. (2 marks)

(b) They are not included in the GDP because the capital gains from the increase in the prices of shares do not involve any production. (c) (2 marks)

It is not included in the GDP because the cake was brought by Mr. Chan for own consumption. (2 marks)

##

|!|ES41004|!| The following diagram shows the production chain of garments in economy A. Textile firms import $3,000 worth of raw materials. Besides, a sales tax of $300 is included in the value of products sold to local consumers. Farmers $1,000 Textile Firms $5,400 Garment Factories $3,200 Foreign Countries Local Consumers

$5,000

Imported Raw Materials

$3,000

Calculate the contribution of the above production chain to economy As (a) GDP at factor cost; and (2 marks) (2 marks)

(b) GDP at market prices.

## (a) The contribution of the above production chain to economy As GDP at factor cost = $(5,000 + 3,200 5,400) + $(5,400 1,000 3,000) + $1,000 $300 = $4,900 (b) The contribution of the above production chain to economy As GDP at market prices = $(5,000 + 3,200 5,400) + $(5,400 1,000 3,000) + $1,000 = $5,200 ## (1 mark) (1 mark) (1 mark) (1 mark)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41005|!| The following diagram shows the production chain of chocolate in Country A. $300 $250 Cocoa beans, $120 Local Importer $110 Chocolate Factory Y $60 Chocolate Factory X $400 $80 Local Consumers Foreign Countries Local Exporters

$420

Foreign Countries

(a)

Calculate, respectively, the contribution of the local importer and chocolate factory Y to the GDP of Country A. (4 marks)

(b) Using the expenditure approach, calculate the contribution of the above production chain to the GDP of Country A. (2 marks)

## (a) The contribution of the local importer to the GDP of Country A = $250 + $110 $120 = $240 The contribution of chocolate factory Y to the GDP of Country A = $80 + $60 $110 = $30 (b) The contribution of the above production chain to the GDP of Country A = $400 + $420 + $80 + $60 $120 = $840 ## (1 mark) (1 mark) (1 mark) (1 mark) (1 mark) (1 mark)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41006|!| The following table shows the gross domestic product data of an economy in a certain year.

Items Private consumption expenditure Government consumption expenditure Gross investment Gross domestic fixed capital formation Domestic exports of goods Re-exports of goods Imports of goods Change in inventories Exports of services Imports of services Direct taxes Indirect taxes Subsidies

$ million 3,200 2,500 1,000 750 1,200 200 450 250 150 180 100 150 200

(a)

Calculate the GDP at market prices of the economy. Show your steps of calculation.

(2 marks) (2 marks)

(b) Calculate the GDP at factor cost of the economy. Show your steps of calculation.

## (a) GDP at market prices = Private consumption expenditure + Gross investment + Government consumption expenditure + Total exports of goods and services Total imports of goods and services = $(3,200 + 1,000 + 2,500 + 1,200 + 200 + 150 450 180) million (1 mark) $7,620 million (b) GDP at factor cost + Subsidies = $7,670 million ## = (1 mark) = GDP at market prices Indirect taxes = $(7,620 150 + 200) million (1 mark) (1 mark)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41007|!| The following table shows the GDP data of Country A.

Year 2008 2009

GDP at current market prices ($ million) 1,345,890 1,388,970

GDP at constant (2005) market prices ($ million) 1,295,688 1,335,660

(a)

The GDP at constant market prices is smaller than the GDP at the current market prices in the two years. Explain the implications for the price level in the two years. (2 marks) (2 marks)

(b) Under what condition would the nominal GDP be lower than the real GDP?

## (a) Real GDP = Nominal GDP (Price index of the base year / Price index of the current year) The GDP at constant market prices was smaller than the GDP at the current market prices in the two years, meaning that the price level in 2008 and 2009 were higher than those in 2005 (the base year). (2 marks)

(b) If the price level of the current year is lower than that of the base year, the nominal GDP would be lower than the real GDP. ## (2 marks)

|!|ES41008|!| The table below shows the GDP data of Country A.

Year 2008 2009

GDP at current market prices ($ billion) 135 157

GDP at constant (2005) market prices ($ billion) 123 138

Per capita real GDP ($) 41,000 43,125

(a)

Calculate, respectively, the growth rate of real GDP and the growth rate of per capita real GDP between 2008 and 2009. (4 marks)

(b) By referring to the answer in (a), predict the change in population size between 2008 and 2009. (2 marks)

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## (a) Growth rate of real GDP = [(Real GDP of the current year Real GDP of the previous year) / Real GDP of the previous year] 100% = $[(138 123) / 123] billion 100% = 12.2% Growth rate of per capita real GDP = [(Per capita real GDP of the current year Per capita real GDP of the previous year) / Per capita real GDP of the previous year] 100% = $[(43,125 41,000) / 41,000] 100% = 5.18% (1 mark) (1 mark) (1 mark) (1 mark)

(b) The growth rate of per capita real GDP is smaller than that of real GDP, this implies that there is an increase in population size between 2008 and 2009. ## (2 marks)

|!|ES41009|!| The following table shows some economic data for Country A in 2009.

GDP at current market prices ($ million) Per capita GDP at current market prices ($) Price index of 2009

5,400 1,500 115

Assume 2008 is the base year. Calculate the following items: (a) the real GDP for 2009 (2 marks) (2 marks) (2 marks)

(b) the population size in 2009 (c) the per capita real GDP for 2009

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) Real GDP in 2009 = Nominal GDP (Price index of the base year / Price index of the current year) = $5,400 million (100 / 115) = $4,696 million (b) The population size of in 2009 = GDP at current market prices / Per capita GDP at current market prices = $5,400 million / $1,500 = 3,600,000 (c) The per capita real GDP in 2009 Real GDP in 2009 / Population size = $4,696 million / 3,600,000 = $1,304 ## (1 mark) (1 mark) (1 mark) (1 mark) (1 mark) (1 mark)

|!|ES41010|!| In using the expenditure approach to calculate the GDP, explain why the following items should be deducted from the GDP: (a) the value of imports of goods and services (3 marks) (3 marks)

(b) the decrease in inventories

## (a) The value of imports of goods and services has been included in private consumption expenditure, gross investment, government consumption expenditure and total exports. However, these goods and services are not produced by the resident producing units of the economy, so their values should be deducted from the GDP. (3 marks)

(b) Decrease in inventories means firms put the goods produced in previous years for sale. As the value of these goods has been included in the GDP of the production years, it should be deducted from the GDP of the current year. ## (3 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41011|!| Explain whether the following should be included in the GDP of the current year: (a) the expenditure by a customer on buying a second-hand car (3 marks) (3 marks)

(b) commission earned by a car sales agent from selling second-hand cars

## (a) It should not be included in the GDP of the current year. (1 mark)

This is because the value of the car was included in the GDP when it was sold for the first time. (2 marks) (b) It should be included in the GDP of the current year. (1 mark)

This is because the commission reflects the value of services provided by the agent in the current year. ## (2 marks)

|!|ES41012|!| The Student Financial Assistance Agency is responsible for administering various financial and scholarship schemes to students who are in need. Explain whether all of the Agencys expenditures are regarded as transfer payment and therefore should not be included in the GDP. (4 marks)

## No. (1 mark)

The grants and scholarships provided to students are regarded as transfer payments and therefore should not be included in the GDP. However, the expenditure of the Student Financial Assistance Agency also includes payments made to employees and purchases of other goods and services. Expenditure on these should be included in the government consumption expenditure and thus the GDP. ## (3 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41013|!| In September 2008, it was discovered that some dairy products contained melamine () in China. The production companies involved recalled and destroyed all of the products that were contaminated with melamine. They also offered compensation to some of the victims. Explain whether the following should be included in Chinas GDP for 2008: (a) the value of the destroyed dairy products (3 marks) (3 marks) (3 marks)

(b) the compensation made to the victims (c) the wages of the civil servants involved in the investigation of the incident

## (a) The value of the destroyed dairy products should not be included in Chinas GDP for 2008. (1 mark) This is because the amount of goods and services for peoples consumption did not increase. The destroyed dairy products also were not counted as a change in the stocks held by the companies. (2 marks) (b) The compensation made to the victims should not be included in Chinas GDP for 2008. (1 mark) This is because the compensation does not involve any production. (c) The wages should be included in Chinas GDP for 2008. (2 marks) (1 mark)

This is because the wages reflect the value of services provided by civil servants in the current period. ## (2 marks)

|!|ES41014|!| In May 2009, a factory agreed to produce 50,000 units of clothing for a wholesaler and the factory was already paid in full. All of the clothing was produced in 2009. Half of the clothing was delivered to the wholesaler in October 2009 but half was not delivered until March 2010. Are the following statements true? Explain. (a) The value of the clothing that was delivered to the wholesaler in October 2009 was included in the GDP for 2009. (3 marks)

(b) The value of the clothing that was delivered to the wholesaler in March 2010 was included in the GDP for 2010. (3 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) True. (1 mark)

As the clothing that was delivered to the wholesaler in October 2009 was produced in 2009, the value of the clothing was included in the GDP for 2009. (b) False. (2 marks) (1 mark)

Since the clothing that was delivered to the wholesaler in March 2010 was produced in 2009, the value of the clothing was included in the GDP for 2009 instead of in the GDP for 2010. (2 marks) ##

|!|ES41015|!| In April 2010, ABC Company employed a programmer to write a new computer game. This programmer received a fixed income every month and he finished his work after one year. The marketing activities started in 2012, though the game was not on sale until 2013 because it took time to test the game. Are the following statements true? Explain. (a) The salary for the programmer was included only in the GDP for 2011. (3 marks) (3 marks)

(b) The marketing expense was included only in the GDP for 2012.

## (a) False. (1 mark)

As ABC Company employed the programmer in 2010, his salary in 2010 should be included in the GDP for 2010. This is because the salary reflects the value of the service of writing a computer game that he provided in the current period. (b) True. (2 marks) (1 mark)

As the marketing activities took place in 2012, the marketing expense was included only in the GDP for 2012. ## (2 marks)

|!|ES41016|!| Must the GDP at factor cost be lower than the GDP at market prices? Explain. (4 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## No. GDP at market prices = GDP at factor cost + Indirect taxes Subsidies (1 mark) (1 mark)

If the amount of indirect taxes is smaller than that of the subsidy, GDP at factor cost would be higher than GDP at market prices. If the amount of indirect taxes is equal to that of subsidies, GDP at factor cost would be equal to GDP at market prices. ## (2 marks)

|!|ES41017|!| Sandy owns a toy factory and a toy shop in Hong Kong. Explain whether the following items should be included in Hong Kongs GDP. If yes, in which component (C, I, G, X or M) should they be included? (a) Sandys expenditure on buying machines for packaging in the toy factory (3 marks) (3 marks) (3 marks)

(b) the expenditure of a Japanese tourist on buying toys in Sandys toy shop (c) Sandys expenditure on buying government bonds

## (a) It is included in Hong Kongs GDP. Sandys expenditure on buying machines for packaging in the toy factory is regarded as expenditure on fixed capital, and is included in the component of gross investment (I). (b) It is included in Hong Kongs GDP. (2 marks) (1 mark) (1 mark)

The expenditure of tourists is regarded as exports of services, and is included in the component of exports (X). (c) It is not included in Hong Kongs GDP. (2 marks) (1 mark)

Sandys expenditure on buying government bonds is regarded as a transfer of wealth. This expenditure does not involve any production. ## (2 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|ES41018|!| A garment importer in Hong Kong imported HK$2 million of clothing. 40% of the clothing was sold to a local wholesaler for HK$1.6 million and the rest was sold to a local garment exporter for HK$1.8 million. The local wholesaler sold the clothing to local retailers for HK$2 million and the local retailers sold the clothing to local consumers for HK$2.5 million. On the other hand, the local garment exporter sold the clothing to a Spanish importer for HK$2.1 million. Finally, the Spanish importer sold the clothing to local consumers in Spain for HK$3.2 million. (a) Rachel said, According to the value added approach, the contribution of the above transactions to Hong Kongs GDP is HK$3.7 million. Is she right? Explain. (3 marks)

(b) How can the approach used by Rachel avoid the problem of double counting? Explain. (3 marks)

## (a) No, Rachel is wrong. (1 mark)

By the value added approach, the contribution of the above transactions to Hong Kongs GDP = Value added of the Hong Kong garment importers + Value added of the local wholesaler + Value added of the local retailers + Value added of the local garment exporter = HK$[(1.6 + 1.8 2) + (2 1.6) + (2.5 2) + (2.1 1.8)] million = HK$2.6 million (2 marks)

Therefore, the contribution of the above transactions to Hong Kongs GDP is not HK$3.7 million. (Students may also explain that Rachel might have included the value added of the Spanish importer in the calculation.) (b) The value added approach calculated the total value added of the goods and services at different stages of production produced by the resident producing units. This method avoids the difficulties of identifying whether an output is a final product or an intermediate product, so the problem of double counting can be avoided. ## (3 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

Long Questions |!|EL41001|!| Johns factory made some chairs and sold them in the domestic market for $30,000 in 2008. (a) State the definition of gross domestic product. (2 marks)

(b) Do you think the contribution of Johns factory from producing these chairs to the GDP was exactly $30,000? Explain. (c) (3 marks)

Suppose a fire broke out in the factory and $10,000-worth of the sold chairs were destroyed completely before the chairs were delivered to the buyer. Fortunately, the buyer had bought insurance and she was fully compensated. (i) How would the accident affect the gross investment of 2008? (3 marks)

(ii) Do you think the compensation would be included in the calculation of the GDP? Explain. (3 marks)

## (a) 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. (2 marks)

(b) The contribution of Johns factory from producing these chairs would be less than $30,000. (1 mark) As the production of chairs requires other inputs, such as raw materials, the contribution of Johns factory to the GDP should be the difference between the market value of the chairs and the value of the inputs used by the factory. As the value of the inputs was greater than zero, the contribution of Johns factory would be less than $30,000. (c) (i) The gross investment in 2008 would not be affected. (2 marks) (1 mark)

As the destroyed chairs had been sold, the level of inventory would not be affected.(2 marks) (ii) The compensation would not be included in the calculation of the GDP. The compensation was a transfer of wealth. It did not involve any production. ## (1 mark) (2 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EL41002|!| The following diagram shows the production chain of handbags in Country B. The handbag manufacturer imports $200 worth of leather. $200 Wholesalers $300 $200 Handbag Manufacturer $300 Retailer B $500 Consumers $300 Retailer A Consumers

$400

Consumers

(a)

Calculate the contribution of the above production chain to the GDP of Country B by using (i) the expenditure approach. (3 marks) (3 marks)

(ii) the value added approach.

(b) Suppose a $70 subsidy is provided to the handbag manufacturer by the government of Country B. (i) State the relationship between the GDP at market prices and the GDP at factor cost. (2 marks) (ii) How will the GDP at market prices and GDP at factor cost of Country B be affected? (2 marks)

## (a) (i) By the expenditure approach, the contribution of the above production chain to Country Bs GDP = $(300 + 500 + 400) $200 = $1,000 (1 mark) (2 marks)

(ii) By the value added approach, the contribution of the above production chain to Country Bs GDP = $(300 + 400 200) + $(200 + 300 300) + $(300 200) + $(500 300) = $1,000 (b) (i) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies (1 mark) (2 marks) (2 marks) (1 mark) (1 mark)

(ii) Country Bs GDP at market prices will not be affected. Country Bs GDP at factor cost will increase by $70. ##

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EL41003|!| The following table shows the GDP data of Country C in 2009.

Items Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Net investment Change in inventories Depreciation Net exports Indirect taxes Direct taxes Subsidies

$ billion 80 60 70 80 30 20 10 5 5 3

(a)

Calculate the GDP at factor cost of Country C for 2009.

(2 marks)

(b) Suppose Country Cs population is 10 million people and its implicit price deflator of GDP is 125. Calculate the per capita real GDP for 2009. (c) (6 marks)

Mrs. Wong, a resident of Country C, receives $3,500 from her son each month. In August 2009, she traveled to China and the trip was paid by her son. She used part of the money her son gave her to buy some books published by China. (i) Mrs. Wong does not have to pay for the trip. Is the trip a free good? Explain. (3 marks)

(ii) Explain whether the money Mrs. Wongs son gave her every month should be included in Country Cs GDP for 2009. (3 marks)

(iii) Explain whether Mrs. Wongs expenditure on books will affect Country Cs GDP for 2009. (3 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

## (a) The GDP at factor cost of Country C for 2009 = Private consumption expenditure + Gross investment + Government consumption expenditure + Net exports Indirect taxes + Subsidies = $(80 + 70 + 30 + 60 + 10 5 + 3) billion (1 mark) (b) The GDP at current market prices of Country C for 2009 = $(80 + 70 + 30 + 60 + 10) billion (1 mark) Real GDP of Country C for 2009 = $250 billion (100 / 125) = $200 billion Per capita real GDP of Country C for 2009 = $200 billion / 10 million = $20,000 (c) (i) The trip is not a free good. (1 mark) (1 mark) (1 mark) (1 mark) (1 mark) (1 mark) = $250 billion (1 mark) = $248 billion

The quantity of trips available is not sufficient to satisfy all human wants and more trips are preferred. OR Provision of it requires the use of scarce resources that have alternative uses. (ii) The amount should not be included in Country Cs GDP. (2 marks) (1 mark) (2 marks)

This is because this is only a transfer of wealth and does not involve any production. (2 marks) (iii) It will affect Country Cs GDP. (1 mark)

This is because the money was spent on goods that were produced by another country instead of the resident producing units of Country C. This is regarded as an import of services and should be deducted from Country Cs GDP. ## (2 marks)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

|!|EL41004|!| The MTR Corporation planned to build the West Island Line, which is an extension of the present Island Line of the MTR System. The announcement was made in 2008. (a) The construction was expected to begin in 2009 and finish by 2013 or 2014. What is the effect of the construction on the GDP for 2009? Explain. (2 marks)

(b) As soon as the plan was announced, prices of the flats in the Western District rose by 20% on average. (i) With the aid of a diagram, explain why the prices of the flats rose. (4 marks)

(ii) Peter bought a flat in the Western District in 1998 and he sold it after the plan was announced. The price was 25% higher than before. Explain whether the increase in the price would be included in the GDP for 2008. (3 marks)

(iii) Peter paid 1% of the price of the flat as commission to a real estate agent. Explain whether this commission would be included in the GDP for 2008. (c) (3 marks)

Suppose the MTRC had to raise capital to construct the extension. If you were the chairperson of the MTRC, which method of raising capital would you choose, issuing shares or bonds? State ONE reason for your choice. (2 marks)

## (a) Hong Kongs GDP for 2009 would increase. (1 mark)

The expenditure on the construction works of the West Island Line in 2009 would be included in the GDP for 2009. (1 mark)

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 15 Measurement of Economic Performance (I)

(b) (i)

The extension would make travelling between the Western District and other areas in Hong Kong more convenient. This would increase the demand for flats in the district. (1 mark)

Given the supply, an increase in demand (from D0 to D1) would lead to an increase in the price of the flats from P0 to P1. Unit price (1 mark)

P1 P0 D1 D0 0 Q0 Quantity (2 marks) (ii) It would not be included in the GDP for 2008. (1 mark)

The flat was not built in 2008. The increase in the price was a capital gain and does not involve any production. (iii) It would be included in the GDP for 2008. (2 marks) (1 mark)

This is because it reflects the value of services provided by the real estate agent in 2008. (2 marks) (c) I would issue shares because the company will have no obligation to pay a dividend to shareholders even when it makes profit. It can enjoy greater flexibility in retaining its profit for future development. OR I would issue bonds because the existing shareholders power of control over the company will not be diluted. (or any reasonable answer) ## (2 marks) (2 marks)

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