of National Income Statistics

Latest Developments in the Compilation of National Income Statistics

of Hong Kong

Speakers: Ms Sharon NG, Senior Statistician Ms Peggy LEE, Statistician

Contents

(I) Latest developments in the compilation of national income statistics in Hong Kong

(II) Fundamental concepts and uses of GDP (III) Chain volume measures of GDP

(IV) Commonly asked questions on the concepts of GDP

(V) Q&As

(I) Latest developments in the compilation of national income

statistics in Hong Kong

Implementation of the latest international statistical standards

 Latest international standards - the System of National Accounts 2008 (2008 SNA) were implemented in September 2012

 Major enhancements :

– Capitalisation of research and development expenditure

– Change of ownership principle in recording trade in goods sent abroad for processing – The term Gross National Product (GNP) is

Capitalisation of research and development (R&D) expenditure

 R&D is long regarded as important capital investment, i.e. part of the Gross Domestic Fixed Capital Formation

 However, the statistical measurements are not straightforward

– Most R&D activities are in-house, without market value

– 2008 SNA recommends to use sum of costs to

Capitalisation of research and development (R&D) expenditure (cont’d)

 Under Gross Domestic Fixed Capital Formation

(GDFCF), a new term “intellectual property products”

was introduced to replace “computer software”

– Include computer software, database and expenditure on R&D

 GDP level was raised by around 0.4% - 0.5% in recent years

– R&D expenditure accounted for around 0.8% of GDP

– Private sector and universities/tertiary institutions accounted for around 40% and over 50% of in-house R&D activities

Change of ownership principle

in recording goods sent abroad for processing

• Concept :

– Old standard : trade recorded when goods cross customs boundary

– Change of ownership principle : trade occurs when buying and selling activities take place (i.e.

ownership of goods is transferred)

Infineon

Camera Module

Toshiba

Display Module

Samsung SDRAM

Example : iPhone

Final assembly

Change of ownership principle

in recording goods sent abroad for processing

• Benefits :

– Better reflect genuine international trade flows – Facilitate analysis of impact of globalisation on

international trade

• Classification :

– Goods sent abroad for processing are not recorded as trade in goods because they do not involve actual buying and selling activities (i.e. no change of ownership)

– Processing fees are recorded as trade in services (imports of manufacturing services)

– Merchanting : value of goods sold is recorded as exports of goods, while the value of goods acquired is recorded as

negative exports of goods, though the goods have not passed through Hong Kong

– Overall balance of trade in goods and services unaffected, implying that the levels and growth rates of overall GDP also unaffected

Change of ownership principle

in recording goods sent abroad for processing

Impact of implementing

the change of ownership principle

 Trade in goods balance: generally changed from deficit to surplus (except 2011 & 2012)

Impact of implementing

the change of ownership principle

 Trade in services balance: generally changed from surplus to deficit (except 2009 – 2012)

Special dissemination arrangement of trade figures in GDP

• Main tables of GDP reports : trade statistics based on the old standards

• Supplementary tables of GDP reports : trade statistics based on the new standards

• Consideration : provide a transition period for data users to adapt to the new set of trade figures in GDP

• The term “Gross National Product” has been replaced by “Gross National Income”

• The term “net external factor income flows” has been replaced by “net external primary income flows”

– To follow international recommendations and practices of other economies

– To better emphasize the fact that this indicator is a measure of income

Gross National Product v.s.

Gross National Income

(II) Fundamental concepts

and uses of GDP

What is Gross Domestic Product (GDP)?

 Gross Domestic Product (GDP): measure of the total value of production (product) of all resident producing units of an economy (domestic) in a specified period,

before deducting the consumption of fixed capital (gross).

Three approaches

for compiling GDP

Three approaches to measure GDP

1. Production measure of GDP

sum of value added of all economic activities

2. Expenditure measure of GDP

final expenditures on consumption, capital formation, and exports less imports

3. Income measure of GDP

sum of compensation of employees and operating surplus of entrepreneurs

Supply

Income Demand

Given there can be 3 alternative approaches to compile GDP, are we supposed to have 3 figures of GDP or one single figure of GDP?

In theory

GDP estimates by the 3

approaches should be the same In practice

Statistical discrepancy exists, as different data sources are used for different approaches

Supply

Income Demand

Availability of GDP statistics in Hong Kong

 Expenditure-based GDP

- Annual series from 1961 - Quarterly series from 1973

 Production-based GDP

- Annual series traced back to 1980 - Quarterly series from 2000

 Income-based GDP

- Once compiled for 1970 - 1980, but had discontinued since 1981







Which approach is adopted for compiling and presenting the GDP figures?

Hong Kong GDP(E) as the headline GDP, supplemented by GDP(P)

US GDP(E) as the headline GDP Singapore GDP(P) as the headline GDP,

supplemented by GDP(E)

Uses of GDP

 Measure of economic growth

Why is GDP so important?

GDP is commonly used for charting the economic growth of an economy

 Measured by change in the volume measure of GDP over time (growth rate in real terms)

 Positive growth : expansion of economic activities

 Negative growth : contraction of economic

activities

GDP as an indicator for measuring the economic growth

Year-on-year percentage change

- GDP in real terms of a quarter compared with that of the same quarter last year

e.g. In the first quarter of 2013, the GDP increased by 2.8% in real terms over a year earlier.

GDP in real terms for Q1 2013 GDP in real terms for Q1 2012

[ - 1] x 100%

Seasonally adjusted GDP series

 Seasonally adjustment: remove the seasonal effects which repeat each year in a systematic manner

 Quarter-to-quarter percentage change

- seasonally adjusted GDP of a particular quarter compared with that of last quarter - capture turning point more promptly

GDP as an indicator for measuring the

economic growth (Cont’d)

HK GDP real growth rate (%)

-10 -5 0 5 10 15 20

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Economic growth cycles in Hong Kong tracked by the real growth of GDP

Average annual real growth

1 2 3 4

5

Economic slow-down in the late-1960s

HK GDP real growth rate (%)

0 2 4 6 8 10 12 14 16 18

1962 1969 1976 1983 1990 1997 2004

1

2010

Economic slow-down in the mid-1970s

HK GDP real growth rate (%)

0 2 4 6 8 10 12 14 16 18

2

Economic slow-down in the mid-1980s

HK GDP real growth rate (%)

0 2 4 6 8 10 12 14 16 18

1962 1969 1976 1983 1990 1997 2004

3

2010

Economic down-turn in the late-1990s

HK GDP real growth rate (%)

-10 -5 0 5 10 15 20

4

Economic down-turn in the late-2000s

HK GDP real growth rate (%)

-10 -5 0 5 10 15 20

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

5

Uses of different measures of GDP

 Production measure

- Indicate the relative contribution of different economic activities to the total GDP

 Expenditure measure

- Analyse the relative economic significance of household, government and investment expenditure

- Indicate the degree of external orientation of an economic territory

 Income measure

- Study the relative shares of compensation of employees and

Methods and data sources

for compiling GDP

Statistical system for GDP

GDP

Trade statistics

Gov’t Account

Household survey Establishment

survey

Price data

Data sources for compilation of GDP(E)

Component Data sources

1. Private consumption expenditure (PCE) = CXDM + REA - NXDM Consumption expenditure in

domestic market (CXDM) - goods

Monthly Survey of Retail Sales

CXDM - services Quarterly Survey of Restaurant Receipts and Purchases; government revenue statistics;

administrative data from HK Jockey Club, MTR, bus companies, ferry companies

Expenditure of residents abroad (REA)

Household surveys on expenditure abroad;

Immigration Department Expenditure of non-residents in

the domestic market (NXDM)

Data from Hong Kong Tourism Board (HKTB)

Data sources for compilation of GDP(E) (Cont’d)

Component Data sources

2. Government consumption expenditure (GCE)

= CE + Purchase - Sales

General revenue accounts; income and expenditure data from quasi-government institutions (e.g. HKTB, HKMA, HA, etc) 3. Gross domestic fixed capital formation (GDFCF)

Cost of ownership transfer Stamp duties collected by IRD; no. of property transfer cases registered with the Land Registry Building and construction Quarterly Survey of Construction Output; data

from government accounts,

quasi-government institutions and public corporations (e.g. MTR, AA, etc)

Machinery, equipment and Trade data; data from government accounts,

Component Data sources

4. Changes in inventories Quarterly Survey of Industrial Production;

Quarterly Survey of Services Industries; Monthly Survey of Retail Sales; data on hydrocarbon oil from Electrical and Mechanical Services

Department 5. Exports and imports of goods Trade data

6. Exports and imports of

services (e.g. transportation, travel, trade services,

financial services)

Data from HKTB and Immigration Department;

Survey of Imports and Exports of Services;

household surveys on expenditure abroad

Data sources for compilation of GDP(E) (Cont’d)

Value added at basic prices v.s. at factor cost

 The valuation of value added has been changed from factor cost to basic prices to follow international standard. This can better reflect the prices actually paid and received by the

producers.

 The basic price, measures the amount retained by the producer, is the price most relevant for the producer’s decision making.

 The valuation at basic prices had been adopted by most of the statistically advanced economies, like the UK, Australia,

Canada and Singapore. The adoption of such approach in

Factor cost

Basic prices

Market prices

Value added at basic prices

= Value added at factor cost + Taxes on production

business registration tax)

Value added at market prices

= Value added at basic prices + Taxes on products*

and hydrocarbon oil)

*

Factor cost

Basic prices

Market prices (Cont’d)

Value added at factor cost

Taxes on production

Taxes on products

GDP at market

prices

80 12 8 100

Value added at basic prices

Taxes on products

GDP at market

+ + =

How is ‘Implicit Price Deflator’

of GDP compiled?

Implicit price deflators (IPD) of GDP and its expenditure components

GDP in volume terms = GDP at current prices x 100

IPD of GDP

In contrast to a deflator , an implicit price deflator is NOT an input for GDP in volume terms (a

misconception)

Current price GDP IPD of GDP

= GDP in volume terms



Current price GDP

 IPD of GDP =

Implicit Price Deflator of GDP (IPD) and Consumer Price Index (CPI)

CPI

 a measure of price changes encompassing goods and services purchased by households

IPD of GDP

 a broad measure of economy-wide inflation,

encompassing a wide varieties on goods and

services for consumption, capital formation

(investment), exports and imports

(III) Chain volume measures

of GDP

Chain Volume Measures of GDP

 C&SD has replaced the constant price measures by the chain volume measures of GDP

 Why?

– Align with the latest international statistical guidelines

– Provide a better measure of the real growth rate of

the aggregate economic activity in an economy as

compared with the constant price volume measure

of GDP

Basic concepts of the volume

measures of GDP

Change over time in the value of GDP can be factored into two components (v = p x q)

 Change in prices of goods and services

$ 10

$20

Value in 2009 increases by 20%, purely due to inflation

$ 12 each

$20

$24

Value in 2010 surges by 50%, as prices increase from

$12 to $18

$ 10

$ 12 each

$ 18 each

$20

$24

$36

Changes in value at price fixed at $10 reflect changes in volume

 Change in their volumes

$ 10 each

$40

$20 $60

International guidelines on volume measures of GDP

 C&SD follows

the 1993 SNA / 2008 SNA

 The 1968 SNA:

fixed-weighted volume index approach – constant price measure of GDP

 The 1993 SNA / 2008 SNA:

annually re-weighted chain linking approach

– chain volume measure of GDP

Compilation of

volume measures of GDP

Constant price measures of GDP

 Adopt the price structure of a fixed base year (say 2000) (hence the concept of “fixed-weighted”)

 Update the base year (rebasing) once every 5 or 10

years

Constant price measures of GDP

Example of linking up the constant price series at 1990 and 2000 prices

1997 1998 1999 2000 2001 2002 2003 At constant 1990 prices 1,095 1,029 1,056 1,140

yoy (%) -6.0 2.6 8.0

At constant 2000 prices 1,500 1,508 1,535 1,581

yoy (%) 0.5 1.8 3.0

At constant 2000 prices 1,440 1,354 1,389 1,500 1,508 1,535 1,581

Chain volume measures of GDP

 Adopt the price structure of preceding year (e.g. for 2011 GDP, use 2011 as base year) and compile the value of GDP

 Compile the real growth rate

 Choose a reference year (e.g. 2010), based on the current value of the reference year, convert the time series of real growth rates into chained dollar series

 The choice of the reference year does not affect the real growth rates

Illustration of compilation of chain volume measure

Year 2007 2008 2009 2010 2011

Values

at current prices ($) 1,000 1,200 1,300 1,400 1,600

(1) Compile the value of GDP using the price structure of the preceding year

Values

at preceding year prices ($) 1,160 1,140 1,300 1,500

(2) Compile the real growth rate

Real growth rate (%) 16.0 -5.0 0 7.1

(3) Choose a reference year, based on the current value of the reference year, convert the time series of real growth rates into chained dollar series

Values

at chained (2010) dollars ($) 1,271 1,474 1,400 1,400 1,499

Base year vs Reference year

 Base year is the year from which the price structures are used for deriving the aggregate values

 For constant price values, the base year is fixed, e.g. 1990, 2000

 For chain volume measure, the base year is always the preceding year in principle

 The reference year provides a reference time point to convert the time series of real growth rates into a time series in dollar value

 The choice of the reference year does not affect the real growth rates

Chained dollar values are non-additive

 Components at constant prices can be added up to total

 Chained dollar value are in general not additive

Merits of the chain volume measure of GDP over the constant price measure

 Better accommodate changes in product mix

 Take account of latest price structures

 Chain volume measures can better gauge the

contributions of components to the real growth of

the GDP aggregate

(IV) Commonly asked questions

on the concepts of GDP

Q1. How are economic activities related to the development of Kai Tak Cruise Terminal captured in GDP by expenditure approach?

 Construction of Kai Tak Cruise Terminal : GDFCF

 Incoming visitors through Kai Tak Cruise Terminal : Exports of travel services

 Outbound travels by HK residents through Kai Tak Cruise Terminal : Imports of travel services

 Services provided by Kai Tak Cruise Terminal to non- resident cruises : Exports of transport services

Note that services provided to resident cruises are not captured in trade in services.

Q2. How are redevelopment projects recorded in GDP by production approach?

 Redevelopment projects mainly involve the following economic activities :

(1) Construction activity: A construction contractor is engaged to demolish the old building and build a new building. These construction activities are covered in Construction Sector.

(2) Real estate development activity: The gross margin (i.e. value of new building less costs) is included in Real Estate Sector.

Costs of real estate developer include: the value of the old building and the payment to contractor, other project development outlays (e.g. architectural, engineering, and other professional fees, marketing, brokerage fees etc.).

(3) Architectural design, surveying, engineering activities: relevant

Q3. People regard the purchase of a residential flat an investment. Is it included in GDFCF of GDP during the period when the flat is purchased?

 No.

 The value of the flat has already been included in GDFCF of GDP previously when the flat was built.

 The purchase of a flat is a transfer of ownership rather than creation of a new asset. Therefore, no new capital formation is captured in GDP.

 However, SNA states that costs incurred in the transfer of ownership of the asset e.g. brokerage fees, legal fees and stamp duties, are included in GDFCF during the period

Q4. Is donation (say to Community Chest) included in GDP?

 Donation is a kind of transfer payment. This means that the party receiving the donation (say Community Chest) does not provide goods and services to the donor in return for the donation.

Hence, no production activity is involved and GDP is not affected.

 Following this concept, GDP in a period will not

increase because of more donation in that period

Q5. Is the natural growth of fish in sea included in the production boundary of GDP?

 The growth of natural resources without human involvement or direction is not included in the production boundary.

 According to the System of National Accounts, a necessary condition for an activity to be treated as production is that the activity should be carried out under the responsibility, control and management of a unit (SNA para. 1.20).

 Therefore, the natural growth of fish in open sea is not regarded as production whereas the catching of fish in open sea and the culture of fish in fish ponds or rafts are regarded as production activities.

Q6. Should ‘Illegal Transactions’ be included in GDP?

 In theory, the answer is YES (1993 SNA’s recommendation) due to the following reasons.

(1) Incomes from illegal production can be spent on purchasing legal goods and services.

(2) Illegal goods and services can be purchased using incomes from the legal sources.

(3) Discrepancies will appear in the account if such production is omitted.

 Practically, reliable estimates are difficult to be produced.

(V) Q&As

The End