chapter 16 measurement of economic performance (ii)

Economics Inquiry for HKDSE – Macroeconomics 1Chapter 16 Measurement of Economic Performance (II)

Multiple Choice Questions

|!|EM42001|!|

Which of the following statements about GNP is CORRECT?

A. Nominal GNP is always larger than real GNP.

B. Per capita GDP is always larger than per capita GNP.

C. Net factor income from abroad can be positive or negative.

D. GNP is always larger than GDP.

##

C

Net factor income from abroad = Factor income earned by residents outside the economic territory –

Factor income earned by non-residents within the economic territory

When the factor income earned by residents outside the economic territory is larger than the factor

income earned by non-residents within the economic territory, net factor income from abroad will be

positive. When the factor income earned by residents outside the economic territory is smaller than the

factor income earned by non-residents within the economic territory, net factor income from abroad

will be negative.

Option A is incorrect.

Real GNP = Nominal GNP (Price index of the base year / Price index of the current year)

Whether nominal GNP is larger than real GNP depends on the price index of the base year and the

current year.

Option B is incorrect. Whether per capita GDP is larger than per capita GNP depends on the difference

between GDP and GNP.

Option D is incorrect.

GNP = GDP + Net factor income from abroad

Whether GNP is larger than GDP depends on the value of the net factor income from abroad.

##

© Aristo Educational Press Ltd. 62


|!|EM42002|!|

Which of the following can explain the difference between GDP and GNP?

(1) GNP includes net exports but GDP does not.

(2) GNP includes indirect taxes and subsidies but GDP does not.

(3) GNP includes net factor income from abroad but GDP does not.

A. (1) only

B. (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

B


Therefore, only GNP includes net factor income from abroad.

(1) is incorrect. Both GDP and GNP include net exports.

(2) is incorrect. Both GDP and GNP include indirect taxes and subsidies.

##

|!|EM42003|!|

According to the Census and Statistics Department, which of the following is/are regarded as

“residents” of Hong Kong?

(1) a Canadian artist who worked in Hong Kong on a six-month contract

(2) a company that was established in Hong Kong in 1984

(3) an American who worked in Hong Kong for 3 years

A. (1) only

B. (1) and (2) only

C. (1) and (3) only

D. (2) and (3) only



##

D

(2) is correct. For organisations, residents refer to those which ordinarily operate in the economic

territory.

(3) is correct. For individuals, residents refer to those who normally stay in the economic territory of

the economy for at least 12 months, or intend to do so, irrespective of their nationalities.

(1) is incorrect. The artist is not a resident of Hong Kong because he stayed in Hong Kong for fewer

than 12 months.

##

|!|EM42004|!|

Which of the following should be included in the net factor income from abroad of Hong Kong?

A. the expenditure of an American tourist on accommodation services in Hong Kong

B. the revenue earned by a Hong Kong resident from selling toys to the USA

C. the interest paid to a foreigner for his savings deposit in a bank in Hong Kong

D. the dividend received by a Hong Kong resident from holding shares of a company listed in

Great Britain

##

D



The dividend received by a Hong Kong resident from holding shares of a company listed in Great

Britain is the factor income earned by residents outside Hong Kong and should be included in net

factor income from abroad of Hong Kong.

Options A and B are incorrect. They are exports of goods and services of Hong Kong and therefore

should not be included in the net factor income from abroad of Hong Kong.

Option C is incorrect. The interest paid to a foreigner for his savings deposit in a bank in Hong Kong is

the factor income earned by non-residents within Hong Kong and should not be included in the net

factor income from abroad of Hong Kong.

##



|!|EM42005|!|

Which of the following should NOT be included in the net factor income from abroad of Hong Kong?

(1) the salary earned by a Hong Kong resident who works for a Chinese company in Beijing

(2) the rent received by a Hong Kong resident who owns premises in New Zealand

(3) the payment made by a Hong Kong resident to a Japanese company for buying a new

handbag

A. (1) only

B. (3) only

C. (1) and (2) only

D. (2) and (3) only

##

B



Since the handbag was an imports of goods, its value should not be included in the net factor income

from abroad.

(1) and (2) are incorrect. The salary earned by a Hong Kong resident who works for a Chinese

company in Beijing and the rent received by a Hong Kong resident who owns premises in New

Zealand are factor income earned by residents outside Hong Kong. Therefore, they should be included

in the net factor income from abroad.

##

|!|EM42006|!|

If gross national product (GNP) is larger than gross domestic product (GDP), this implies that net factor

income from abroad

A. is increasing.

B. is decreasing.

C. is positive.

D. is negative.



##

C


If GNP is larger than GDP, the net factor income from abroad must be positive.

Options A and B are incorrect. The question does not mention any change in GDP or GNP.

##

|!|EM42007|!|

If the net factor income from abroad is negative, gross national product (GNP) will be _____________

than gross domestic product (GDP) and factor income earned by non-residents within the economic

territory will be _____________ than factor income earned by residents outside the economic territory.

A. larger … larger

B. larger … smaller

C. smaller … larger

D. smaller … smaller

##

C


If the net factor income from abroad is negative, GNP will be smaller than GDP.



If the net factor income from abroad is negative, factor income earned by non-residents within the

economic territory will be larger than factor income earned by residents outside the economic territory.

##

|!|EM42008|!|

To calculate the GNP of Hong Kong, which of the following should be added to the GDP of Hong

Kong?

A. the income earned by a Hong Kong resident from working at the Hong Kong branch office

of a Japanese company

B. the income earned by a French chef who has worked in Hong Kong for a month

C. the interest received by a Hong Kong resident from his savings deposit in a bank in Australia

D. the investment made by a Mainland businessman in a restaurant in Hong Kong



##

C

GNP = GDP + Net factor income from abroad, where



As the interest received by a Hong Kong resident from his savings deposit in a bank in Australia is

factor income earned by residents outside the economic territory, it should be added to the GDP of

Hong Kong in calculating the GNP.

Options A and D are incorrect. They are not factor income earned by residents outside the economic

territory, therefore they should not be added to the GDP of Hong Kong in calculating the GNP.

Option B is incorrect. The income earned by a French chef who has worked in Hong Kong for a month

is factor income earned by non-residents within the economic territory, therefore it should be deducted

from the GDP of Hong Kong in calculating the GNP.

##

|!|EM42009|!|

Which of the following should be deducted from the gross domestic product (GDP) of Hong Kong in

calculating the gross national product (GNP) of Hong Kong?

(1) the income received by a Japanese who teaches Japanese in a Japanese language school in

Hong Kong for 3 months

(2) the dividends paid to an American for holding shares of a listed company in Hong Kong

(3) the rental income received by a Hong Kong resident who leases out his apartment in the

Mainland

A. (3) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)



##

B

GNP = GDP + Net factor income from abroad, where



(1) and (2) are correct. As they are factor income earned by non-residents within the economic territory,

they should be deducted from the GDP in calculating the GNP of Hong Kong.

(3) is incorrect. As the rental income received by a Hong Kong resident who leases out his apartment in

the Mainland is factor income earned by residents outside the economic territory, it should be added to

the GDP in calculating the GNP of Hong Kong.

##

|!|EM42010|!|

Consider the economic data of Country X shown in the table and answer the following question.

Components $ billion

Private consumption expenditure 230

Government consumption expenditure 190

Net domestic fixed capital formation 100

Changes in inventories 20

Depreciation 5

Net exports 150

Factor income paid abroad 110

Factor income from abroad 80

Refer to the above information. The GNP at market prices is _________________ billion.

A. $655

B. $660

C. $665

D. $670



##

C

GNP at market prices = GDP at market prices + Net factor income from abroad

= $[(230 + 190 + (100 + 20 + 5) + 150 + (80 – 110)] billion

= $665 billion

##

|!|EM42011|!|

Consider the economic data of Country X shown in the table and answer the following question.

Components $ million



Gross investment 90

Changes in inventories -30

Depreciation 10

Net exports 70

Indirect taxes 20

Subsidies 50

Net factor income from abroad -50

Refer to the above table. The GNP at factor cost is _________________ million.

A. $230

B. $260

C. $290

D. $320



##

D

GNP at factor cost = GDP at market prices + Net factor income from abroad – Indirect tax + Subsidies

= $[(100 + 80 + 90 + 70) – 50 – 20 + 50] million

= $320 million

##

|!|EM42012|!|

Consider the economic data of Country X shown in the table and answer the following questions.

Component $ billion




Decrease in inventories 50

Depreciation 10

Indirect taxes X

Subsidies 5

Net exports 320

Net factor income from abroad 55

(a) Refer to the above table. The GNP at market prices is _________________ billion.

A. $730

B. $760

C. $805

D. $915

(b) If GDP at factor cost is $700 billion, the value of X is _________________ billion.

A. $40

B. $45

C. $50

D. $55



##

(a) C

GNP at market prices = GDP at market prices + Net factor income from abroad

= $[(230 + 60 + 180 – 50 + 10 + 320) + 55] billion

= $805 billion

(b) D

GDP at market prices = GDP at factor cost + Indirect tax – Subsidies

$(230 + 60 + 180 – 50 + 10 + 320) billion = $(700 + X – 5) billion

X = 55

##

|!|EM42013|!|

Which of the following should be included in Hong Kong’s GDP but not in Hong Kong’s GNP?

A. the income earned by a Korean doctor who has been operating a clinic in Hong Kong for

several years

B. the revenue of an outlet in Macau run by a Hong Kong-based garment company

C. the dividends earned by a British from the shares of a company listed in Hong Kong

D. the money received by a Hong Kong resident from the sale of his old mobile phone



##

C

As the dividend is distributed from a Hong Kong company (a resident producing unit of Hong Kong), it

should be included in Hong Kong’s GDP. On the other hand, dividends earned by the British should not

be included in Hong Kong’s GNP as this is factor income earned by non-residents within the economic

territory.

Option A is incorrect. As the Korean doctor is a resident producing unit of Hong Kong, the income

earned should be included in Hong Kong’s GDP. Moreover, as the Korean has worked in Hong Kong

for more than a year, he is regarded as a resident of Hong Kong. Therefore, his income should also be

included in Hong Kong’s GNP.

Option B is incorrect. As the outlet is not a resident producing unit of Hong Kong, the revenue should

not be included in Hong Kong’s GDP. On the other hand, as it is factor income earned by residents

outside the economy territory, it should be included in Hong Kong’s GNP.

Option D is incorrect. The value of the old mobile phone was included in the GDP when it was sold for

the first time. Therefore, the money received should not be included in either the GDP or the GNP for

the current year.

##

|!|EM42014|!|

Which of the following should be included in Hong Kong’s GNP but not in Hong Kong’s GDP?

A. the salary received by an Australian for working at a restaurant in Hong Kong for 5 years

B. the salary received by a Hong Kong resident for working at a company in Hong Kong that is

owned by an American

C. the rent received by a Hong Kong resident from leasing out his flat in Canada

D. the interest received by a Mainland resident from money deposited in a bank in Hong Kong



##

C

Since the rent received by a Hong Kong resident from leasing out his flat in Canada is factor income

earned by residents outside the economic territory, it should be included in Hong Kong’s GNP only.

Option A is incorrect. Since the Australian was employed by a resident producing unit of Hong Kong,

his income should be included in Hong Kong’s GDP. Moreover, as the Australian worked in Hong

Kong for more than a year, he is regarded as a resident of Hong Kong, and the salary should be

included in Hong Kong’s GNP as well.

Option B is incorrect. Since the Hong Kong resident is employed by a resident producing unit of Hong

Kong, his income should be included in Hong Kong’s GDP. Moreover, as he is a resident of Hong

Kong, his salary should be included in Hong Kong’s GNP as well.

Option D is incorrect. As the interest received by the Mainland resident who deposits money in a bank

in Hong Kong is factor income earned by non-residents within the economic territory, it should not be

included in Hong Kong’s GNP.

##

|!|EM42015|!|

Mrs. Wong, who came from the Mainland, worked as a Putonghua teacher in a language centre in Hong

Kong for two years. The salary she received should be included in

A. Hong Kong’s GDP only.

B. Hong Kong’s GNP only.

C. both Hong Kong’s GDP and GNP.

D. neither Hong Kong’s GDP nor GNP.

##

C

As Mrs. Wong was employed by a resident producing unit of Hong Kong, her salary should be included

in Hong Kong’s GDP. Moreover, as Mrs. Wong worked in Hong Kong for more than a year, she is

regarded as a resident of Hong Kong. Therefore, her salary should be included in Hong Kong’s GNP as

well.

##



|!|EM42016|!|

Jason is an American. He worked in a company in Hong Kong for nine months. Jason’s salary for these

nine months should be included in

A. Hong Kong’s GNP.

B. both Hong Kong’s GDP and GNP.

C. the US’s GDP.

D. the US’s GNP.

##

D

To the US, Jason’s salary is factor income earned by residents outside the economic territory.

Therefore, it should be included in the US’s GNP.

Options A and B are incorrect. To Hong Kong, Jason’s salary is factor income earned by non-residents

within the economic territory. Therefore, it should be excluded from Hong Kong’s GNP.

Option C is incorrect. As Jason was not employed by a resident producing unit of the US, his salary

should not be included in the US’s GDP.

##

|!|EM42017|!|

Carson has been working for a company in Japan for ten years and he still holds a HKSAR identity

card. Which of the following statements is CORRECT?

A. Carson’s salary during this period was included in Hong Kong’s GNP as he still holds the

HKSAR identity card.

B. Carson’s salary during this period was included in both Hong Kong’s GDP and GNP.

C. Carson’s salary during this period was included in Japan’s GDP only as he is not a resident

of Japan.

D. Carson’s salary during this period was included in both Japan’s GDP and GNP.



##

D

As Carson was employed by a resident producing unit of Japan (the company in Japan), his salary was

included in the GDP of Japan. As Carson has worked in Japan for more than a year, he was regarded as

a resident of Japan, and his salary was included in the GNP of Japan.

Options A and B are incorrect. As Carson had not stayed in Hong Kong for at least 12 months, he was

not regarded as a resident of Hong Kong and therefore his salary was not included in the GNP of Hong

Kong. As Carson was not employed by a resident producing unit of Hong Kong, his salary was not

included in the GDP of Hong Kong.

##

|!|EM42018|!|

If the factor income earned by residents outside the economic territory increases and its net factor

income from abroad remains unchanged, this implies that

(1) its GDP increases.

(2) its GNP increases.

(3) the factor income earned by non-residents within the economic territory increases.

A. (1) only

B. (3) only

C. (1) and (2) only

D. (1), (2) and (3)



##

D



(1) and (3) are correct. If the factor income earned by residents outside the economic territory increases

and its net factor income from abroad remains unchanged, this means the factor income earned by non-

residents within the economic territory increases. As the factor income earned by non-residents within

the economic territory is included in the GDP, an increase in the factor income earned by non-residents

within the economic territory leads to an increase in the GDP.

(2) is correct. As the GDP increases and the net factor income from abroad remains unchanged, the

GNP increases.

##

|!|EM42019|!|

Suppose real GNP decreases but real GDP remains unchanged. This means that the net factor income

from abroad

A. is positive.

B. is negative.

C. increases.

D. decreases.

##

D

Real GNP = Real GDP + Net factor income from abroad

If real GNP decreases but real GDP remains unchanged, net factor income from abroad must decrease.

##

|!|EM42020|!|

Which of the following statements about national saving is CORRECT?

A. National saving must be equal to domestic investment in a closed economy.

B. Private saving must be equal to public saving.

C. National saving must not be equal to domestic investment in an open economy.

D. None of the above.



##

A

In a closed economy, Y = C + I + G, so I = Y – C – G. As S = Y – C – G, S = I.

Option C is incorrect. In an open economy, S – I = NX. If NX = 0, national saving is equal to domestic

investment.

##

|!|EM42021|!|

Which of the following statements about national saving are CORRECT?

(1) National saving is the income left after paying for government consumption expenditure.

(2) If there is a budget deficit, public saving will be negative.

(3) Private saving is the income left after paying for taxes and private consumption.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

C

(2) is correct. Public saving is equal to the government budget balance after paying for government

consumption expenditure with tax revenue. If there is a budget deficit, the government consumption

expenditure is larger than the tax revenue. Therefore, public saving will be negative.

(1) is incorrect. National saving is the income left after paying for private consumption expenditure and

government consumption expenditure.

##



|!|EM42022|!|

In a closed economy, Y = $200, C = $80, G = $50, SP = $30 where Y, C, G and SP are national income,

private consumption expenditure, government consumption expenditure and private saving

respectively. There is a _________________ and domestic investment is _________________.

A. budget surplus of $30 … $40

B. budget surplus of $40 … $70

C. budget deficit of $30 … $40

D. budget deficit of $40 … $70

##

B

National saving (S) = Y – C – G

= $200 – $80 – $50

= $70

Public saving = National saving – Private saving (SP)

= $70 – $30

= $40

Public saving = Tax revenue (T) – Government consumption expenditure (G)

As public saving is positive, there is a budget surplus.

As national saving equals domestic investment in a closed economy, domestic investment is therefore

$70.

##

|!|EM42023|!|

In a closed economy,

A. the current account balance is always equal to zero.

B. public saving is always equal to domestic investment.

C. private saving is always equal to domestic investment.




##

A

NX = CA. As there is no trade of goods and services in a closed economy, the current account balance

is always equal to zero.

Options B and C are incorrect. In a closed economy, private saving and public saving can be greater

than, smaller than or equal to domestic investment respectively. Only the sum of public saving and

private saving must be equal to domestic investment.

##

|!|EM42024|!|

If there is a budget surplus in a closed economy, which of the following MUST be positive?

A. national saving

B. public saving

C. private saving

D. trade balance

##

B

Public saving (SG) = Tax revenue (T) – Government consumption expenditure (G)

When there is a budget surplus, T > G, public saving is thus positive.

##

|!|EM42025|!|

If government consumption expenditure exceeds tax revenue,

(1) national saving is negative.

(2) public saving is negative.

(3) there is a budget deficit.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)



##

C

(2) is correct. Public saving = Tax revenue – Government consumption expenditure

If government consumption expenditure is larger than tax revenue, public saving will be negative.

(3) is correct. When government consumption expenditure is larger than tax revenue, the government

revenue cannot cover all her expenses. There is a budget deficit.

(1) is incorrect. National saving = Private saving + Public saving

We can only tell that public saving is negative. Whether national saving is negative or not depends on

the value of private saving.

##

|!|EM42026|!|

Which of the following statements about an open economy is CORRECT?

A. National saving is always equal to domestic investment.

B. National saving is equal to the sum of net exports and domestic investment.

C. If net exports is zero, public saving will be equal to domestic investment.

D. Private saving is always equal to public saving.

##

B

In an open economy, S – I = NX, therefore S = NX + I.

Option A is incorrect. In an open economy, S – I = NX. Only if NX = 0, national saving is equal to

domestic investment.

Option C is incorrect. If net exports is zero, national saving instead of public saving is equal to

domestic investment.

Option D is incorrect. National saving = Private saving + Public saving. There is no definite

relationship between private saving and public saving.

##



|!|EM42027|!|

In an open economy,

(1) if national saving and domestic investment are not equal, the balance of trade must not reach

a balance.

(2) if national saving is smaller than domestic investment, the current account balance will be

positive.

(3) if domestic investment is smaller than national saving, the capital and financial account

balance will be negative.

A. (1) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

B

(1) is correct. As S – I = NX, if national saving is not equal to domestic investment, net exports will

either be larger than or smaller than zero and the balance of trade will not reach a balance.

(3) is correct. If domestic investment is smaller than national saving, the surplus in saving is used to

finance foreign investment. There will be a net capital outflow and the capital and financial account

balance will be negative.

(2) is incorrect. As S – I = NX = CA, if S < I, NX < 0 and CA < 0.

##

|!|EM42028|!|

In an open economy, if domestic investment exceeds national saving, there will be a _____________

and the net capital outflow is _____________.

A. trade surplus … positive

B. trade surplus … negative

C. trade deficit … positive

D. trade deficit … negative



##

D

As S – I = NX, when I > S, NX < 0. Therefore, there will be a trade deficit. As part of domestic

investment is financed by borrowing from abroad, there is a net capital inflow (i.e. the net capital

outflow is negative).

##

|!|EM42029|!|

In an open economy, if national saving is larger than domestic investment, the value of exports will be

_____________ than the value of imports. The capital and financial account balance will be

_____________.

A. greater … positive

B. greater … negative

C. smaller … positive

D. smaller … negative

##

B

As S – I = NX, when S > I, NX > 0. Therefore, the value of exports will be greater than the value of

imports. As the surplus in saving is used to finance foreign investment, there will be a net capital

outflow. The capital and financial account will be negative.

##

|!|EM42030|!|

In an open economy, if national saving is smaller than domestic investment,

A. there will be a trade surplus.

B. the capital and financial account balance will be negative.

C. there will be a net capital inflow.

D. the current account balance will be positive.



##

C

S – I = NX = CA = -KA

If S < I, NX < 0. There will be a trade deficit and the economy will be a net borrower in world financial

markets, which implies there is a net capital inflow.

Option B is incorrect. As there is a net capital inflow, it means that part of domestic investment is

financed by borrowing from abroad. The capital and financial account balance will be positive.

Option D is incorrect. Since CA = -KA, if the capital and financial account balance is positive, the

current account balance will be negative.

##

|!|EM42031|!|

In an open economy, when there is a trade surplus,

A. domestic investment is larger than national saving.

B. net capital outflow is negative.

C. the current account balance will be negative.

D. the capital and financial account balance will be negative.

##

D

S – I = NX = CA = -KA

A trade surplus implies national saving is larger than domestic investment. There will be a net capital

outflow and the capital and financial account balance will be negative.

Option B is incorrect. As there is a net capital outflow, net capital outflow is positive.

Option C is incorrect. As the capital and financial account balance is negative, the current account

balance will be positive.

##

|!|EM42032|!|

Country X is an economy with a trade deficit. The following statements are correct EXCEPT

A. part of its domestic investment is financed by borrowing from abroad.

B. its net capital outflow is positive.

C. its current account balance is negative.

D. its capital and financial account is positive.



##

B

As S – I = NX, when there is a trade deficit (NX < 0), S < I. As part of domestic investment is financed

by borrowing from abroad, there will be a net capital inflow, i.e. net capital outflow is negative.

Options C and D are incorrect. As there is a net capital inflow, the capital and financial account balance

is positive. As CA = -KA, the current account balance is therefore negative.

##

|!|EM42033|!|

If the capital and financial account balance of an open economy is positive, this implies that

(1) there is a trade deficit.

(2) national saving is larger than domestic investment.

(3) there is a net capital inflow.

A. (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

B

If the capital and financial account balance is positive, this implies that there is a net capital inflow. A

capital inflow implies that part of domestic investment is financed by borrowing from abroad and the

national saving is smaller than the domestic investment. As S – I = NX, when S < I, NX < 0. There is a

trade deficit.

##

|!|EM42034|!|

If the net capital outflow of an economy is negative, this implies that

A. there is a trade deficit.

B. national saving exceeds domestic investment.

C. there is a budget deficit.

D. the current account balance is positive.



##

A

If the net capital outflow is negative (capital inflow), it means that domestic investment exceeds

national saving and part of domestic investment is financed by borrowing from abroad. As S – I = NX,

when S < I, NX < 0. Therefore, there is a trade deficit.

Option C is incorrect. There is a budget deficit when SG < 0. As we do not have enough information to

deduce the value of SG, we do not know if there is a budget deficit.

Option D is incorrect. As CA = -KA, when KA > 0, CA < 0. Therefore, the current account balance is

negative.

##

|!|EM42035|!|

In an economy, the amount of capital inflow is smaller than that of capital outflow. This implies that

there is a ______________ and the capital and financial account balance is ______________.





##

B

If capital inflow is smaller than capital outflow, there is a net capital outflow. This implies that national

saving is larger than domestic investment and the surplus in saving is used to finance foreign

investment. Therefore, the capital and financial account balance will be negative. As S – I = NX, when

S > I, NX > 0. Therefore, there is a trade surplus.

##



|!|EM42036|!|

Suppose the current account balance of an open economy is positive. Which of the following

statements is CORRECT?

A. Its capital and financial account balance is positive.

B. There is a net capital inflow.

C. Its national saving is larger than its domestic investment.

D. There is a trade deficit.

##

C

As CA = -KA, if the current account balance is positive, the capital and financial account balance is

negative. This implies that there is a net capital outflow. The national saving is larger than the domestic

investment and the surplus in saving is used to finance foreign investment.

Option D is incorrect. As S – I = NX, when S > I, NX > 0, which means there is a trade surplus.

##

|!|EM42037|!|

In an open economy, national saving is $800 and private saving is $600. Net exports is $500. There is a

_________________ and domestic investment is _________________.

A. budget surplus of $200 … $300

B. budget surplus of $300 … $300

C. budget deficit of $200 … $800

D. budget deficit of $300 … $800

##

A

As national saving = private saving + public saving, public saving = $(800 – 600) = $200, which is a

budget surplus (T – G > 0).

In an open economy, S – I = NX, thus I = $(800 – 500) = $300.

##



|!|EM42038|!|

In an economy, private saving is $500 and domestic investment is $1,000. Suppose the government has

a budget deficit of $200. There will be a _________________ and the current account balance will be

________________.

A. trade surplus of $300 … positive

B. trade surplus of $700 … positive

C. trade deficit of $300 … negative

D. trade deficit of $700 … negative

##

D

As there is a budget deficit of $200, public saving is thus -$200.

National saving = Private saving + Public saving

= $500 – $200

= $300

As S – I = NX, NX = $300 – $1,000 = -$700

As net exports is negative, there is a trade deficit of $700.

As NX = CA, when net exports is negative, the current account balance will be negative.

##

|!|EM42039|!|

In an economy, national saving is $700 and there is a trade deficit of $700. Domestic investment is

_________________.

A. $0

B. $700

C. -$1,400

D. $1,400

##

D

S – I = NX

$700 – I = -$700

I = $1,400

##



|!|EM42040|!|

In an open economy, Y = $200, C = $60, I = $80, G = $90, where Y, C, I and G are national income,

private consumption expenditure, gross investment and government consumption expenditure

respectively.

According to the above information, there is a _____________, and the capital and financial account

balance is _____________.





##

C

Y = C + I + G + NX

$200 = $60 + $80 + $90 + NX

NX = -$30

NX = -KA. As NX is negative, the capital and financial account balance will therefore be positive.

##

|!|EM42041|!|

In a closed economy, C = $200, G = $110, S = $220, where C, G and S are private consumption

expenditure, government consumption expenditure and national saving respectively. The national

income of the economy is _____________.

A. $240

B. $460

C. $530

D. $680



##

C

National saving represents the income left after paying for private consumption expenditure and

government consumption expenditure. Therefore,

S = Y – C – G

$220 = Y – $200 – $110

Y = $530

##

|!|EM42042|!|

Consider the following data of an open economy:

Y = $300 C = $70 G = $90 I = $60

Y, C, G and I are national income, private consumption expenditure, government consumption

expenditure and gross investment respectively.

If private saving is $180, there is a _____________ and _____________ in the economy.

A. budget surplus … trade surplus

B. budget surplus … trade deficit

C. budget deficit … trade surplus

D. budget deficit … trade deficit



##

C

National saving = Y – C – G

= $300 – $70 – $90

= $140

National saving = Private saving + Public saving

$140 = $180 + Public saving

Public saving = -$40

Since public saving is negative, this implies government consumption expenditure is greater than tax

revenue. There is a budget deficit.

S – I = NX

NX = $140 – $60

= $80

Since net exports is positive, there is a trade surplus.

##

|!|EM42043|!|

In an open economy, Y = $600, C = $200, G = $150, I = $300, where Y, C, G and I are national income,

private consumption expenditure, government consumption expenditure and gross investment

respectively. Which of the following statements is CORRECT?

A. National saving is negative.

B. National saving exceeds domestic investment.

C. There is a net capital outflow.

D. The capital and financial account balance is positive.

##

D

S = Y – C – G

= $600 – $200 – $150

= $250

As national saving ($250) is smaller than domestic investment ($300), part of domestic investment is

financed by borrowing from abroad, which means there is a net capital inflow. Therefore, the capital

and financial account balance will be positive.

##



|!|EM42044|!|

The GDP statistics can be used to

(1) compare the economic development of different economies.

(2) evaluate the business prospects.

(3) measure income inequality.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)

##

B

The GDP statistics can only reflect the average living standard and do not take income distribution into

account.

##

|!|EM42045|!|

All of the following are the uses of GDP statistics EXCEPT

A. reflecting the average living standard.

B. providing information to the government when formulating economic policies.

C. reflecting the external cost to society brought by production.

D. helping firms to make investment plans.

##

C

Production incurs external cost to society (such as air pollution and traffic congestion), but this is not

reflected in GDP statistics.

##



|!|EM42046|!|

In which of the following situations will the per capita real GDP overstate the living standard of

people?

A. People enjoy more leisure time than before.

B. The general price level increases by 10% during the year.

C. Income is more unevenly distributed.

D. There is an increase in the population size because of immigration.

##

C

Per capita real GDP only measures the average living standard of people and does not take income

distribution into account. Therefore, when income is more unevenly distributed, people’s living

standard is overstated.

Option A is incorrect. Enjoying more leisure time raises people’s living standard but this is not reflected

in the GDP statistics. The per capita real GDP will understate the living standard.

Option B is incorrect. Per capita real GDP is not affected by price changes.

Option D is incorrect. Per capita real GDP has already taken the effect of population size into account.

##

|!|EM42047|!|

Real GDP will understate people’s living standard if

A. traffic congestion becomes less serious after the construction of subways.

B. the working hours of people increase.

C. the general price level decreases by 20% during the year.

D. capital goods make up a large proportion of the total output of the economy.



##

A

Lessening serious traffic congestion raises people’s living standard but this is not reflected in the GDP

statistics. Therefore, the real GDP will understate people’s living standard.

Option B is incorrect. Longer working hours lowers people’s living standard and this is not reflected in

the GDP statistics. The real GDP will overstate people’s living standard.

Option C is incorrect. Real GDP is not affected by price changes.

Option D is incorrect. If capital goods make up a large proportion of the total output of the economy,

current living standard will be lower and this will not be reflected in the GDP statistics. Therefore, real

GDP overstates people’s living standard.

##

|!|EM42048|!|

Country X and Country Y have the same per capita real GDP. However, Country X has a higher

average living standard than Country Y. This may be because

A. the population size of Country X is smaller than that of Country Y.

B. the general price level of Country X is lower than that of Country Y.

C. the problem of air pollution in Country X is more serious than that in Country Y.

D. the average working hours of people of Country X is less than that of Country Y.

##

D

Shorter average working hours implies more leisure time. More leisure time raises the living standard

of people in Country X, which is not reflected in per capita real GDP. Therefore, Country X has a

higher average living standard than Country Y, even if their per capita real GDP is the same.

Option A is incorrect. As the per capita real GDP measures the amount of output that a person can

consume on average, it has already taken the effect of population size into account.

Option B is incorrect. Real GDP is not affected by price changes.

Option C is incorrect. More serious air pollution lowers the living standard of people, which is not

reflected in per capita real GDP. It cannot be used to explain why Country X has a higher average

living standard than Country Y.

##



|!|EM42049|!|

The real GDP of Country X and Country Y are the same. However, Country X has a lower standard of

living than Country Y. Which of the following can explain this situation?

(1) The general price level of Country X is higher than that of Country Y.

(2) The population size of Country X is larger than that of Country Y.

(3) The problem of air pollution is more serious in Country X than in Country Y.

(4) The average working hours are shorter for people in Country X than in Country Y.

A. (1) and (4) only

B. (2) and (3) only

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

D. (1), (2) and (4) only

##

B

(2) is correct. For the same amount of goods and services produced, the larger the population, the

smaller the amount of output a person can consume on average.

(3) is correct. More serious air pollution lowers people’s living standard and this is not reflected in the

GDP statistics.

(1) is incorrect. Real GDP is not affected by the price level.

(4) is incorrect. Shorter average working hours raises people’s living standard and this is not reflected

in the GDP statistics. This factor cannot explain why Country X has a lower standard of living than

Country Y.

##



|!|EM42050|!|

Real GDP is not a perfect indicator reflecting the standard of living of different economies because

(1) the inflation rate of different economies may be different.

(2) the population size of different economies may be different.

(3) the income distribution of different economies may be different.

(4) the proportion of investment expenditure in GDP of different economies may be different.

A. (1) and (2) only

B. (2) and (3) only

C. (1), (3) and (4) only

D. (2), (3) and (4) only

##

D

(2) is correct. Real GDP measures the real value of goods and services. For the same amount of goods

and services produced, the larger the population, the smaller the amount of output a person can

consume on average.

(3) is correct. Real GDP only measures the average living standard and does not take income

distribution into account.

(4) is correct. The composition of output is not reflected in the GDP statistics. If investment

expenditure constitutes a larger proportion of GDP, current living standard will be lower.

(1) is incorrect. Real GDP is not affected by price changes.

##

|!|EM42051|!|

A 10% increase in real GNP implies that

A. population size increases by 10%.

B. the general price level increases by 10%.

C. per capita real GDP increases by 10%.


##

D

##



|!|EM42052|!|

Consider the economic data below of Country Y in certain year.

Item Growth rate (%)Nominal GNP 5

Price level 10Population -10

According to the above data, the real GNP has ________________ and the per capita real GNP has

______________.

A. decreased … increased

B. increased … increased

C. decreased … decreased

D. increased … decreased

##

A

As the percentage increase in nominal GNP is smaller than that in the price level, real GNP has

decreased. Besides, as the percentage decrease in real GNP is smaller than that in population, per capita

real GNP has increased.

##



Short Questions

|!|ES42001|!|

(a) Define gross national product (GNP) and gross domestic product (GDP). (4 marks)

(b) What is the difference between GNP and GDP? (2 marks)

##

(a) Gross national product (GNP) is the total value of goods and services produced by the factors of

production owned by the residents (nationals) of an economy in a given period. (2 marks)

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. (2 marks)

(b) The difference between GNP and GDP is the net factor income from abroad. (1 mark)

GNP = GDP + Net factor income from abroad (1 mark)

##

|!|ES42002|!|

Should the following items be included in the calculation of Hong Kong’s gross national product

(GNP)? Explain.

(a) the wages of a Hong Kong resident who has worked as a waiter in a restaurant in the Shanghai

Pudong International Airport for six months (2 marks)

(b) the lottery prize won by a Hong Kong resident in the US (2 marks)

(c) the bonus received by a Japanese from the company in Hong Kong that he has worked for nine

months (2 marks)

##

(a) The wage should be included in the calculation of Hong Kong’s GNP. (1 mark)

It is factor income earned by residents outside Hong Kong. (1 mark)

(b) The lottery prize should not be included in the calculation of Hong Kong’s GNP. (1 mark)

It does not involve any production. (1 mark)

(c) The bonus should not be included in the calculation of Hong Kong’s GNP. (1 mark)

It is factor income earned by non-residents (the Japanese) within Hong Kong. (1 mark)

##



|!|ES42003|!|

Explain whether the following items should be included in the calculation of Hong Kong’s gross

domestic product and gross national product.

(a) the salary earned by an American while working for a company in Hong Kong on a 6-month

contract (4 marks)

(b) the salary earned by a Hong Kong resident while working for a company in America for five

months (4 marks)

##

(a) The salary should be included in Hong Kong’s GDP. (1 mark)

The American was employed by a resident producing unit of Hong Kong. (1 mark)

The salary should not be included in Hong Kong’s GNP. (1 mark)

It is regarded as factor income earned by non-residents within Hong Kong. (1 mark)

(b) The salary should not be included in Hong Kong’s GDP. (1 mark)

The Hong Kong resident was not employed by a resident producing unit of Hong Kong. (1 mark)

The salary should be included in Hong Kong’s GNP. (1 mark)

It is regarded as factor income earned by residents outside the economic territory. (1 mark)

##

|!|ES42004|!|

In order to calculate the gross national product of Hong Kong, explain whether the following items

should be added to or deducted from the gross domestic product of Hong Kong.

(a) the rental income received by a Mainland resident from renting out his flat in Hong Kong

(2 marks)

(b) the income earned by a Hong Kong resident who worked at a boutique in Canada for nine months

(2 marks)

##

(a) The rental income should be deducted from the GDP of Hong Kong when calculating the GNP.

(1 mark)

It is regarded as factor income earned by non-residents within Hong Kong. (1 mark)

(b) The income should be added to the GDP of Hong Kong when calculating the GNP. (1 mark)

It is regarded as factor income earned by residents outside Hong Kong. (1 mark)

##



|!|ES42005|!|

Study the table below.

Components $ millionPrivate consumption expenditure 250Government consumption expenditure 170Gross investment 210Total exports of goods and services 220Re-exports of goods 70Total imports of goods and services 150Changes in inventories -30Depreciation 60Subsidies 80Indirect taxes 110Factor income paid abroad 140Factor income from abroad 180

(a) Calculate the GNP at market prices. Show your steps. (2 marks)

(b) Calculate the GNP at factor cost. Show your steps. (2 marks)

##

(a) GNP at market prices = C + I + G + NX + Net factor income from abroad

= $[250 + 210 + 170 + (220 – 150) + (180 – 140)] million (1 mark)

= $740 million (1 mark)

(b) GNP at factor cost = GNP at market prices – Indirect taxes + Subsidies

= $(740 – 110 + 80) million (1 mark)

= $710 million (1 mark)

##



|!|ES42006|!|


Items $ billionPrivate consumption expenditure 420Net domestic fixed capital formation 600Changes in inventories -40Depreciation 25Government consumption expenditure 250Domestic exports of goods 120Imports of goods 170Re-exports of goods 80Imports of services 140Exports of services 130Transfer payments 90Net factor income from abroad -20Subsidies 55Indirect taxes 60Direct taxes 110

(a) Calculate the GDP at market prices. Show your steps. (2 marks)

(b) Calculate the GNP at factor cost. Show your steps. (2 marks)

##

(a) GDP at market prices

= C + I + G + NX = $[420 + (600 + 25 –

40) + 250 + (120 + 80 – 170 + 130 – 140)] billion (1 mark)

= $1,275 billion (1 mark)

(b) GNP at factor cost

= GDP at market prices + Net factor income from abroad + Subsidies – Indirect taxes

= $[1,275 + (-20) + 55 – 60] billion (1 mark)

= $1,250 billion (1 mark)

##



|!|ES42007|!|

(a) Define public saving and private saving. (4 marks)

(b) Under what condition will national saving of an open economy be equal to domestic investment?

(2 marks)

##

(a) Public saving is the saving of the government sector. (1 mark)

It is equal to the government budget balance after paying for government consumption

expenditure with tax revenue. (1 mark)

Private saving is the saving of the private sector (households and firms). (1 mark)

It is the income left after paying for taxes and consumption. (1 mark)

(b) For an open economy, S – I = NX. (1 mark)

When net exports is zero, national saving will be equal to domestic investment. (1 mark)

##

|!|ES42008|!|

(a) What is balance of payments? (2 marks)

(b) Explain why the balance of payments account is always balanced. (2 marks)

##

(a) Balance of payments refers to a statistical record of transactions between residents of the reporting

country and residents of the rest of the world during a given time period. (2 marks)

(b) The balance of payments account is always balanced because each international transaction must

involve a swap of goods, services or assets between two countries. The two sides of the swap

would have offsetting effects on the accounts. (2 marks)

##

|!|ES42009|!|

Suppose there is a trade surplus in an economy.

(a) Explain whether national saving of the economy is higher than, lower than or equal to domestic

investment. (2 marks)

(b) Explain whether the capital and financial account balance of the economy is positive or negative.

(2 marks)



##

(a) As S – I = NX in an open economy, when NX > 0, S > I. Therefore, national saving is higher than

domestic investment. (2 marks)

(b) As S > I, the surplus in saving is used to finance foreign investment and there is a net capital

outflow. Therefore, the capital and financial account balance is negative. (2 marks)

##

|!|ES42010|!|

In Country X, domestic investment exceeds national saving. Assume that the unilateral transfers and

the net international factor income are both zero. With the use of the saving-investment identity, explain

whether

(a) there is a trade surplus or deficit. (2 marks)

(b) the current account balance and the capital and financial account is positive or negative. (3 marks)

##

(a) As S – I = NX in an open economy, when S < I, NX < 0. Therefore, there is a trade deficit.

(2 marks)

(b) As S < I, part of domestic investment is financed by borrowing from abroad. There is a net capital

inflow and the capital and financial account balance is positive. (2 marks)

As CA = -KA, the current account balance is negative. (1 mark)

##

|!|ES42011|!|

In Country X, the capital and financial account balance has a deficit of $50.

(a) Given that domestic investment is $120, calculate the national saving. (2 marks)

(b) Explain whether there is a trade surplus or deficit. (2 marks)

##

(a) S – I = -KA

S = -(-$50) + $120 (1 mark)

= $170 (1 mark)

(b) As S – I = NX, when S > I ($170 > $120), NX > 0. Therefore, there is a trade surplus. (2 marks)

##



|!|ES42012|!|

Consider the following data of an economy.

Private consumption expenditure (C) = $500

Gross investment (I) = $370

Government consumption expenditure (G) = $250

Net exports (NX) = -$70

(a) Calculate national saving of the economy. (2 marks)

(b) Suppose private saving is $360. Explain whether there is a budget surplus or deficit. (3 marks)

##

(a) S = I + NX

= $370 + (-$70) (1 mark)

= $300 (1 mark)

(b) S = Private saving + Public saving

Public saving = $300 – $360 (1 mark)

= -$60 (1 mark)

As public saving is negative, i.e. government consumption expenditure is larger than tax revenue,

there is a budget deficit. (1 mark)

##

|!|ES42013|!|

Study the following data.


Gross investment (I) = $150


National saving (S) = $110

(a) Calculate national income (Y) and net exports (NX). (4 marks)

(b) Calculate the capital and financial account balance. (2 marks)



##

(a) S = Y – C – G

Y = $110 + $200 + $120 (1 mark)

= $430 (1 mark)

NX = S – I

= $110 – $150 (1 mark)

= -$40 (1 mark)

(b) Since S < I, part of domestic investment is financed by borrowing from abroad and there is a net

capital inflow. As S – I = -KA, there is a capital and financial account surplus of $40. (2 marks)

##

|!|ES42014|!|

Consider the following data of an economy.

National income (Y) = $1,000



Net exports (NX) = $280

(a) Calculate national saving (S) and domestic investment (I). (4 marks)

(b) Explain whether the capital and financial account balance is positive or negative. (2 marks)

##

(a) S = Y – C – G

= $1,000 – $200 – $150 (1 mark)

= $650 (1 mark)

S – I = NX

I = S – NX

= $650 – $280 (1 mark)

= $370 (1 mark)

(b) As national saving ($650) exceeds domestic investment ($370), the surplus in saving is used to

finance foreign investment. There is a net capital outflow. The capital and financial account

balance is thus negative. (2 marks)

##



|!|ES42015|!|

Suggest and explain TWO possible uses of GDP statistics. (4 marks)

##

Possible uses of GDP statistics:

- Reflection of standard of living: In an economy with high GDP, there are usually more goods and

services available for people’s consumption and the standard of living is therefore higher.

- Formulation of government policies: GDP statistics give the government a big picture of economic

performance and provide information to the government when formulating government policies.

- Basis for comparison: GDP statistics can be used to compare the living standard and the economic

development of different economies.

(Mark the FIRST TWO points only, 2 marks each)

##

|!|ES42016|!|

Compared with Country Y, Country X has lower per capita real GDP but a higher standard of living.

Give TWO reasons to explain this situation. (4 marks)

##

Possible reasons include:

- Income distribution in Country X is more equal than that in Country Y.

- Consumption expenditure constitutes a larger proportion of GDP in Country X than in Country Y.

- People in Country X enjoy more leisure time than people in Country Y.

- There are more non-market activities in Country X than in Country Y.

- The environmental quality in Country X is better than that in Country Y.


##



|!|ES42017|!|

(a) Ben said, “By looking at the nominal GDP of an economy, we can see the standard of living of

people in the economy accurately.”

Candy said, “No, I think nominal GDP is not accurate enough to reflect the standard of living of

an economy because it ignores price fluctuations and population size.”

Who is correct? Explain. (5 marks)

(b) Candy said, “I think per capita real GDP is a perfect indicator of standard of living.” Suggest

TWO reasons to explain why Candy is wrong. (4 marks)

##

(a) Candy is correct. (1 mark)

An increase in nominal GDP can be the result of an increase in prices rather than an increase in

the amount of goods and services produced. An increase in nominal GDP therefore may not mean

an increase in living standard. (2 marks)

Size of population affects the average living standard of people. For the same amount of goods

and services produced, the larger the population, the smaller the amount of output a person can

consume on average. (2 marks)

(b) Per capita real GDP does not reflect the following facts:

- Income distribution: With unequal distribution of income, even if GDP is high, a small group of

rich people may consume very expensive goods while a large group of poor people may consume

cheap goods.

- Composition of output: The higher the proportion of consumption expenditure constitutes to

GDP, the higher the current living standard.

- Leisure time: Although more leisure time raises the living standard of people, the calculation of

GDP does not take leisure time into account because it is not transacted in the market.

- Non-market activities: Although unpaid and voluntary services raise the living standard of

people, they are not included in the GDP calculation because they are not transacted in the market.

- Environmental quality: The undesirable effects of production adversely affect the environment

and lower the living standard of people in the economy, but they are not reflected in GDP

statistics.


##



|!|ES42018|!|


Country GDP in 20X1

(US$ billion)

Per capita GDP in 20X1

(US$)

Average leisure time of eachresident per day (hours)

A 2,400 2,000 6.5B 3,000 1,500 8

(a) With reference to the GDP and per capita GDP of both countries in 20X1, explain how GDP fails

to reflect the standard of living of both countries accurately. (3 marks)

(b) Referring to the table, explain why the standard of living of Country B may be underestimated as

compared to Country A. (3 marks)

##

(a) As the GDP of Country A is lower than that of Country B, but the per capita GDP of Country A is

higher than that of Country B, we can conclude that the population size of Country A is smaller

than that of Country B. Therefore, GDP fails to reflect the standard of living of both countries

accurately as the difference between the population sizes of the two countries is ignored. (3 marks)

(b) From the table, the average leisure time of residents of Country B is higher than that of Country

A. More leisure time raises the living standard of people, but it is not reflected in the GDP

statistics. As a result, the standard of living of Country B is underestimated as compared to

Country A.

(3 marks)

##



|!|ES42019|!|

The tables below show the information for the population and real gross domestic product (GDP) of

Country X and Country Y.

Country X Country YReal GDP $21 billion Real GDP $24 billionPopulation 7 million Population 6 million

(a) Calculate the per capita real GDP of Country X and Country Y. (4 marks)

(b) Based on your answer in (a), which country do u think has a higher standard of living? Suggest

TWO factors to explain why your answer may be wrong. (5 marks)

##

(a) Per capita real GDP = Real GDP / Population

Per capita real GDP of Country X

= $21 billion / 7 million (1 mark)

= $3,000 (1 mark)

Per capita real GDP of Country Y

= $24 billion / 6 million (1 mark)

= $4,000 (1 mark)

(b) As the per capita real GDP of Country Y is higher than that of Country X, Country Y’s standard of

living is higher. (1 mark)

Possible reasons why Country Y’s standard of living may not be higher than Country A include:

- Income distribution in Country X may be more equal than in Country Y.

- Consumption expenditure may constitute a larger proportion of GDP in Country X than in

Country Y.

- People in Country X may enjoy more leisure time than people in Country Y.

- There may be more non-market activities in Country X than in Country Y.

- The environmental quality in Country X may be better than that in Country Y.


##



Long Questions

|!|EL42001|!|

Read the following economic data of Country X of a certain year.

Items $ billion


Gross domestic fixed capital formation 28

Changes in inventories -4

Depreciation 5


Total exports of goods 50

Re-exports of goods 15

Total imports of goods 46

Total exports of services 45

Total imports of services 48

Factor income from abroad 20

Factor income paid abroad 16

Direct taxes 9

Indirect taxes 10

Subsidies 6

(a) What is the difference between gross domestic product and gross national product? (2 marks)

(b) Calculate the GNP at market prices and at factor cost of Country X. (4 marks)

(c) Explain whether the following items should be included in the calculation of Country X’s GDP

and GNP.

(i) the salary earned by a resident of Country X while working in Country Y on a 6-month

contract (4 marks)

(ii) the salary earned by a resident of Country Y while working in Country X on a 6-month

contract (4 marks)



##

(a) The difference between GNP and GDP is the net factor income from abroad. (1 mark)

GNP = GDP + Net factor income from abroad (1 mark)

(b) Country X’s GNP at market prices

= C + I + G + NX + Net factor income from abroad

= $[30 + (28 – 4) + 25 + (50 – 46 + 45 – 48) + (20 – 16)] billion (1 mark)

= $84 billion (1 mark)

Country X’s GNP at factor cost

= GNP at market prices – Indirect taxes + Subsidies

= $(84 – 10 + 6) billion (1 mark)


(c) (i) It should not be included in Country X’s GDP. (1 mark)

The resident was not employed by a resident producing unit of Country X. (1 mark)

It should be included in Country X’s GNP. (1 mark)

The salary was regarded as factor income earned by residents outside the economic territory.

(1 mark)

(ii) It should be included in Country X’s GDP. (1 mark)

The resident was employed by a resident producing unit of Country X. (1 mark)

It should not be included in Country X’s GNP. (1 mark)

The salary was regarded as factor income earned by non-residents within Country X.

(1 mark)

##



|!|EL42002|!|

Consider the following data of Country X in 20X0:

National income (Y) = $500


Domestic investment (I) = $150


(a) (i) Calculate national saving (S). (2 marks)

(ii) Suppose private saving is $120. Explain whether there is a budget deficit or surplus and

calculate its amount. (3 marks)

(b) Explain whether the trade balance is in deficit or surplus and calculate the amount. (3 marks)

(c) Explain whether the capital and financial account balance and the current account balance are

positive or negative. (4 marks)

(d) According to the latest information, the national income of Country X increases compared with

that in 20X0. However, its standard of living falls. Give TWO reasons that can explain this

phenomenon. (4 marks)

##

(a) (i) S = Y – C – G

= $500 – $200 – $120 (1 mark)

= $180 (1 mark)

(ii) S = Private saving + Public saving

Public saving = $180 – $120 (1 mark)

= $60 (1 mark)

As public saving is positive, there is a budget surplus of $60. (1 mark)

(b) NX = S – I

= $180 – $150 (1 mark)

= $30 (1 mark)

There is a trade surplus of $30. (1 mark)

(c) As S > I ($180 > $150), the surplus in saving is used to finance foreign investment. There is a net

capital outflow and the capital and financial account balance is negative. (2 marks)

As CA = -KA, when KA < 0, CA > 0. Therefore, the current account balance is positive. (2 marks)



(d) The reasons include:

- The increase in national income may be a result of an increase in prices rather than an increase

in the amount of goods and services produced.

- The population of Country X increases and the increase in population is more than the increase

in national income in Country X.

- The income distribution of Country X may become more uneven.

- The consumption expenditure may constitute a smaller proportion of GDP as compared with

20X0.

- People in Country X may enjoy less leisure time as compared with 20X0.

- There may be fewer unpaid and voluntary services as compared with 20X0.

- The environmental quality may have worsened as compared with 20X0.


##



|!|EL42003|!|

The following table shows the data of Country X in 20X1.

Components $ billion




Changes in inventories 50

Indirect taxes 50

Net exports 60

Net factor income from abroad 55

Depreciation 10

(a) Calculate the GDP at factor cost of Country X in 20X1. (2 marks)

(b) Calculate the GNP at market prices of Country X in 20X1. (2 marks)

(c) Mr. Chan is 70 years old and he has retired. Explain which of the following revenue that he

receives should be included in Country X’s GDP.

(i) the money received from his daughter in Canada (2 marks)

(ii) the rent received from renting his premises in Country Y (2 marks)

(iii) the salary received from working as a part-time worker at a company in Country X (2 marks)

(d) Give TWO reasons to explain why the above GDP statistics are not a perfect indicator to measure

the living standard of Country X. (4 marks)

##

(a) The GDP at factor cost of Country X in 20X1

= Private consumption expenditure + Gross investment + Government consumption expenditure +

Net exports – Indirect taxes

= $[150 + (200 + 50 + 10) + 350 + 60 – 50] billion (1 mark)


(b) The GNP at market prices of Country X in 20X1

= GDP at factor cost + Indirect taxes + Net factor income from abroad

= $(770 + 50 + 55) billion (1 mark)




(c) (i) It should not be included in the GDP. (1 mark)

It is a transfer payment that does not involve any production of goods and services. (1 mark)

(ii) It should not be included in the GDP. (1 mark)

It is not produced within Country X. It is regarded as factor income earned by residents

outside Country X. (1 mark)

(iii) It should be included in the GDP. (1 mark)

Mr. Chan is employed by a resident producing unit of Country X. (1 mark)

(d) The above GDP statistics cannot reflect the effects of the following factors:

- Price fluctuation: An increase in nominal GDP can be a result of an increase in prices rather than

an increase in the amount of goods and services produced. An increase in nominal GDP therefore

may not mean an increase in living standard.

- Effect of population size: For the same amount of goods and services produced, the larger the

population, the smaller the amount of output a person can consume on average.

- Income distribution: With unequal distribution of income, even if GDP is high, a small group of

rich people may consume very expensive goods while a large group of poor people may consume

cheap goods.

- Composition of output: The higher the proportion of consumption expenditure constitutes to

GDP, the higher the current living standard.

- Leisure time: More leisure time raises the living standard of people, but the calculation of GDP

does not take leisure time into account because it is not transacted in the market.

- Non-market activities: Although unpaid and voluntary services raise the living standard of

people, they are not included in the GDP calculation because they are not transacted in the market.

- Environmental quality: The undesirable effects of production adversely affect the environment

and lower the living standard of people in the economy, but they are not reflected in GDP

statistics.


##



|!|EL42004|!|

Country A is an open economy. Suppose Y = $180, C = $50, G = $40 and I = $30, where Y, C, G and I

are national income, private consumption expenditure, government consumption expenditure and gross

investment respectively.

(a) Calculate the amount of national saving (S) and net exports (NX). (4 marks)

(b) Calculate the current account balance and capital and financial account balance. (4 marks)

(c) Explain under what situation private saving equals gross investment. (3 marks)

##

(a) S = Y – C – G

= $(180 – 50 – 40) (1 mark)

= $90 (1 mark)

NX = S – I

= $(90 – 30) (1 mark)

= $60(1 mark)

(b) S – I = NX = CA = -KA

As NX = $60, the current account is in surplus of $60. (2 marks)

Therefore, the capital and financial account is in deficit of $60. (2 marks)

(c) As S = SP + SG and S = I + NX, SP + SG = I + NX. When public saving equals the net exports,

private saving equals gross investment. (3 marks)

##


chapter 16 measurement of economic performance (ii)

Documents

gdp net factor income

real gnp

abroadwhether gnp

cnet factor income

thefactor income

nominal gnp price index

differencebetween gdp

net exports