Question

Question 2 (10 marks) 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. (a) The Hong Kong Police Force are set to receive HK$25.8 billion from the 2020 government budget! 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 "sp?cialist supplies and equipment such as armored vehicles with water or sonic cannons, from foreign countries. (2.5 marks) (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 companies. (2.5 marks) Source: "Hong Kong police chief says bumper budget increase is vital in fight against 'new normal' of firebombings and local terrorism threat", South China Morning Post, 2nd March, 2020. Source: Show me the money: "Hongkongers welcome HK$10,000 handout but wonder when they will actually get it", South China Morning Post, 26 February, 2020.

Answer 1

a. Yes. The above expenditure will be included in calculating GDP of the nation and will be a part of Government Expenditure in the calculating of GDP using expenditure approach.

b. Yes. It will be considered as a part of the consumption expenditure of the consumers.

c. Since importing machine is an intermediary good used for the production of the final good, thus, it will not be included in the calculating of GDP. Because value of only final goods and services is included and not intermediary goods and services.

d. Yes. Purchase of robots will be considered a part of the investment expenditure of the firm and thus will be included under Investment component of GDP.