Question

(a) “If Country X has a higher level of real GDP per person than Country Y, then citizens in Country X must enjoy a higher standard of economic welfare than citizens in Country Y.” Do you agree or disagree this statement? Why?

(b) Michael paid HK$300,000 to buy a new car in 2019 and he sold his car to Gary at HK$150,000 in 2020. How did these transactions affect the GDP in 2020? Briefly explain your answer.

(c) How does the production of a Hong Kong firm in Mainland China affect Hong Kong’s GDP and

GNP? Explain your answer.

Answer 1

a) I disagree. Economic welfare cannot be measured only using real GDP per capita since the distribution of income may not be even in the country i.e. the inequality gap can be huge even if the gdp per capita in country x is higher therefore it is not correct to say that Country X enjoys higher standard of economic welfare compare to Country Y.

b) Since Michael sold his car in 2020 but it is a second hand good it would not add any value to the GDP for the year of 2020.
The value addition from the production and purchase of the car has already been computed in the GDP for the year of 2019.
Therefore this transaction of second hand good doesn't affect the GDP for the year 2020.

c) GDP is computed on the basis of all goods and services produced in a country in a year so the production of a Hong Kong firm would be accounted in China's GDP.
When calculating GNP the net factor income from abroad factor is added to GDP i.e. the factor income sent to abroad is subtracted and factor income earned from abroad is added to the GDP calculation in order to calculate the GNP.
In case of the Hong Kong firm the earnings of the firm would be accounted in terms of Net factor income to abroad and hence would be deducted from China's GDP when calculating China's GNP.