Question

Decide how each of the following transactions, if they were carried out, would affect HK GDP. Determine which expenditure component(s) would be affected, if any. If the transactions would not affect HK GDP, explain why.

1. (a) The Hong Kong Police Force are set to receive HK$25.8 billion from the 2020 government budget1. They plan to use HK$21.9 billion to increase its police force by 2,543, which is the biggest manpower boost since 1997. They also plan to use HK$612 million to purchase “specialist supplies and equipment”, such as armored vehicles with water or sonic cannons, from foreign countries. (2.5 marks)

2. (b) The Hong Kong Government has announced a HK$10,000 handout for all permanent residents over the age of 18. A typical household spends the entire HK$10,000 to purchase only 20 boxes of face masks imported from Japan and pay a 10% shipment fee to local logistics companies2. (2.5 marks)

(c) Responding to shortages of face masks amid a frightening coronavirus epidemic, without any subsidy or assistance from the government, a group of Hong Kong citizens pay US$150,000 to import a machine from a factory near Chennai, India. The machine can produce 36 million masks in the year. The plan to sell the masks exclusively online for HK$1 a piece to local citizens3. (2.5 marks)

(d) The MTR has gone high-tech in its fight against the coronavirus, introducing a fleet of robots to help clean its trains. The robots will be spraying hydrogen peroxide, which is said to be safe and effective in wiping out germs and viruses. The robot is an invention of Avalon, a Hong Kong biotechnology company. Each robot costs HK$1 million and the MTR plans to purchase 20 robots from Avalon4. (2.5 marks)

Answer 1

solution:

GDP is value of goods and services produced in a country in that year. There are two methods to calculated GDP; one is income method another is expenditure method. The given question is suitable for expenditure method since it constitutes expenditue by various entities. In expenditure method, Gross domestic product said to have four components; domestic consumption, investment, government expenditure and net export.

a) The $25.8 billion is the government expenditure component one can consider but then part of this expenditure is used to buy the imports, that is where the component net exports come. Net exports is actually exports - imports but then imports should not generally effect GDP, since we are measuring only good and services produced in a country. We only subtract imports when it is part of some other component, like in here government expenditure. So, government expenditure is $25.8 billion and imports are $612 million which need to be subtracted.

b) The HK$10,000 given to citizens is generally called as transfer payments and transfer payments are not considered to be part of GDP. Since, it may cause double counting problem in the consumption as well. We consider HK$10,000 used by individuals as personal consumption expenditure and also additional 10% of it as additional consumption expenditure, however we subtract HK$10000 again as imports from the equation. So, in net terms only 10% of HK$10,000 i.e, HK$1000 is considered in GDP.

c) This is actually importing intermediate good which is machinery to produce the good. If a machine can produce 36 million masks sold at HK$1 which will in total value of HK$36 million will be calculated as consumption component and US$150000 will be subtracted as an import component.

d) Considering MTR as business entity, buying robot will add to business inventories of MTR. The expenditure of HK$20 million is considered as private business investment component. Since it is also domestically produced robots there will not be any subtraction.

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