Gross Domestic Product (GDP) and Gross National Product (GNP) are core statistics in National Accounts. They are both important economic indicators and useful for analysing the economic situation of a country or territory, with the former particularly useful for reflecting the level of production, and the latter for aggregate income of residents.

The concept of "resident" is crucial to the compilation of GDP and GNP statistics. Practically, residents of a country or territory include individuals and organisations. According to international standards, for individuals, residents refer to those who normally stay in the economic territory of the country or territory, irrespective of their nationality. For organisations, residents refer to those which ordinarily operate in the economic territory of the country or territory. The economic territory of a country or territory is the geographic territory administered by the government of the country or territory within which persons, goods and capital circulate freely. Conceptually, the residence status of individuals and organisations depends on their centre of economic interest.

Data on transactions and assets and liabilities vis-a-vis the mainland of China are treated as external transactions and external positions respectively. Examples of external transactions are trade in goods, trade in services and external factor income flows. Examples of external positions are stocks of inward and outward direct investments.

Implementation of the Latest International Guidelines on Chain Volume Measures of GDP

The chain volume measures of GDP and its components were released in mid-October 2007 to replace the previous constant price measures. This is to gear with the latest international guidelines on the compilation of GDP in volume terms in order to provide a better measure of the real growth of the aggregate economic activity of an economy.

Compared with the previous constant price approach where the price structure as weights for aggregating the volume estimates of the GDP components is only updated once every several years, the new calculation method of chain volume measure is a more enhanced approach, as the price structure is updated every year, thus providing a better measure of the growth of GDP in real terms.

For details of these latest statistical developments, please see the feature article entitled "Chain Volume Measures of Hong Kong's Gross Domestic Product" published in the October issue of Hong Kong Monthly Digest of Statistics and the Special Report on Gross Domestic Product - Chain Volume Measures of Gross Domestic Product.

Gross Domestic Product

GDP is a measure of the total value of production of all resident producing units of a country or territory in a specified period, before deducting allowance for consumption of fixed capital.

Per capita GDP of a country or territory is obtained by dividing total GDP in a year by the population of that country or territory in the same year.

GDP can be measured using different approaches. For Hong Kong, GDP is compiled using the expenditure approach and the production approach.

GDP by Expenditure Component

Under the expenditure approach, GDP is compiled as total final expenditures on goods and services (including private consumption expenditure, government consumption expenditure, gross domestic fixed capital formation, changes in inventories and exports of goods and services), less imports of goods and services. Details of the expenditure components are described below :

(i)	Private consumption expenditure : This refers to the value of final consumption expenditure on goods and services by households and private non-profit institutions serving households.  It is calculated as the sum of expenditure on consumption goods and services in the domestic market and consumption expenditure of Hong Kong residents abroad, less the expenditure of non-residents (e.g. visitors) in the domestic market. Compiled from a wide range of data sources, private consumption expenditure (PCE) is a comprehensive measure of household overall spending on consumption goods (purchased from various channels including the conventional retail outlets) and services purchased locally or outside Hong Kong. PCE is distinguished from retail sales statistics in that:
	(1)	retail sales statistics, primarily intended to measure the sales receipts of goods sold by local retail establishments for gauging the short-term business performance of the local retail sector, refer to consumer spending on goods purchased from local retail establishments but do not cover those consumer spending on electricity, gas and water and on various services such as housing, transportation, education, medical and health care, recreation, entertainment;
	(2)	visitors' spending in Hong Kong is included in the retail sales figure but not in PCE; and
	(3)	Hong Kong residents' consumption expenditure abroad is covered in PCE but such spending outside Hong Kong is outside the coverage of retail sales statistics.
(ii)	Government consumption expenditure : This refers to the current expenditure on goods and services by government departments which are not engaged in market activities and quasi-government non-profit institutions. It is calculated as the sum of compensation of employees and purchases of goods and services less receipts from sales of goods and services. Government departments engaged in market activities are not covered. They are distinguished from other government departments in that they are engaged in the production of goods and services mainly for sale to the public.
(iii)	Gross domestic fixed capital formation : This covers the gross value of investment expenditure on machinery, equipment and computer software as well as building and construction; and costs of ownership transfer.
(iv)	Changes in inventories : This refers to the value of physical change in the inventories of work-in-progress, raw materials and finished goods held by business enterprises, mainly manufacturers and distributors.
(v)	Exports and imports of goods : Exports of goods include domestic exports and re-exports of goods recorded on f.o.b. basis. Imports of goods are valued on f.o.b. basis. External trade of non-monetary gold is also included.
(vi)	Exports and imports of services : These cover transactions in services between Hong Kong residents and the rest of the world. The major service groups include transportation, travel, merchanting and other trade-related services, and other services. Other services cover a wide variety of services including financial services; insurance services; business and professional services.

GDP by expenditure component in current market prices and volume terms are compiled. In the latter, the effect of price changes is removed.

Changes in current market price series reflect the combined result of changes in : (a) price level and (b) real production of goods and services from one period to another.

Changes in volume terms series reflect changes in real production of goods and services from one period to another. The effect of changes in price is removed.

The implicit price deflator of GDP (or GDP deflator in short) is generally used as a broad measure of overall inflation in the economy. It takes account of all price changes relating to consumption, investment, exports and imports.

The volume measures of GDP and its expenditure components are compiled based on the annually re-weighted chain linking approach. In compiling the volume measure of GDP for a particular year, volume estimates of major components revalued at preceding year prices are first produced by ¡§deflating¡¨ the current price values of sub-components by the relevant price indices at the most disaggregated levels. The volume estimate of GDP for that particular year is then obtained by aggregating the volume estimates of GDP components revalued at preceding year prices. The short-term volume index of GDP for that particular year is then calculated by dividing the volume estimate of GDP for that year by the current price GDP for the preceding year. Short-term volume indices for other years are compiled in a similar manner. The preceding-year weighted short-term volume indices for other years are then chain linked to a selected reference year in order to obtain a continuous time series of the chain volume indices of GDP and its components. The chain volume index series are converted into the chained dollar series by multiplying the current price value in the reference year by the corresponding chain volume index.

The GDP deflator is implicitly obtained by dividing the current price GDP by the chained dollar estimates of GDP. Similarly, by dividing each of the GDP components at current prices with each of the corresponding chained dollar figures, the respective implicit price deflators for individual expenditure components are implicitly obtained. Hence as it stands, the implicit price deflators of GDP and its expenditure components are not used as input for compiling the corresponding chain volume measures.

In the seasonally adjusted GDP series, seasonal effects have been removed statistically, thus enabling figures for consecutive quarters to be compared more meaningfully. When the year-on-year changes for the quarterly figures in the original GDP series and the quarter-to-quarter changes for the quarterly figures in the seasonally adjusted GDP series are analysed together, the trend of the GDP can be more clearly discerned.

Gross Domestic Product (GDP) by Economic Activity

Under the production approach, GDP is the sum of the value added of resident producing units, e.g. factories, shops, service organisations. Value added of a producing unit is the value of goods and services it produces ('gross output') less the value of goods and services it uses up in the course of production ('intermediate consumption'). GDP by economic activity shows the value added of individual economic activities.

GDP by expenditure component is selected as the single measure of GDP. In presenting GDP by economic activity, GDP is equal to the sum of value added of respective economic activities plus taxes on production and imports plus statistical discrepancy. Statistical discrepancy refers to the difference in values of GDP compiled using the expenditure and production approaches, as a result of the adoption of different data sources and estimation methods.

GDP by economic activity in current prices and in volume terms are compiled. The current price series is compiled on an annual basis as from 1980, while the chain volume  series is compiled on a quarterly basis as from the first quarter of 2000. 

GDP by economic activity provides data to support sectoral analyses from various perspectives. Firstly, annual current price GDP by economic activity provides data for analysing the longer-term trend in the relative importance of economic activities. This helps to depict changes in the underlying economic structure. Secondly, the year-on-year percentage changes of chain volume measures of GDP by economic activity provide data for assessing the relative performance of different economic activities. In the chain volume series, the effect of price changes has been removed. Thirdly, chain volume measures of GDP by economic activity provides data for analysing the contribution of economic activities to overall economic growth. This facilitates analysis of the source of growth of an economy. 

Economic activities covered by GDP by economic activity are classified according to the "Hong Kong Standard Industrial Classification Version 1.1" (HSIC V1.1) as follows : agriculture and fishing; mining and quarrying; manufacturing; electricity, gas and water; construction; wholesale, retail and import and export trades, restaurants and hotels; transport, storage and communications; financing, insurance, real estate and business services; and community, social and personal services. For national accounting purpose, an additional activity entitled ownership of premises is also covered.

Ownership of premises is treated as an economic activity in the national accounts. This activity covers (a) the leasing services provided by residential owner-occupiers to themselves; (b) owner-occupied premises of government and private non-profit institutions; and (c) the leasing services provided to tenants by owners of premises in individual capacity.

Gross National Product

GNP is a measure of the total income earned by residents of a country or territory from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside. In other words, in compiling GNP, earnings of residents from various economic activities within or outside the economic territory are included, whereas earnings of non-residents from economic activities within the economic territory are excluded.

Per capita GNP of a country or territory is obtained by dividing GNP in a year by the population of that country or territory in the same year.

Factor income is mainly classified into investment income and compensation of employees (CE). Investment income includes direct investment income (DII), portfolio investment income (PII) and other investment income (OII).

DII refers to earnings of residents from their direct investment outside the economic territory and earnings of non-residents from their direct investment within the economic territory, in which direct investors have a lasting interest and a significant degree of influence or effective voice in the management. These earnings are in the form of receipts of distributed dividends, share of undistributed profits, net interest receipts from inter-company debts and gross rentals.

PII refers to earnings of residents from investment in non-resident equity (e.g. stocks and shares) and debt securities (e.g. bonds and notes, money market instruments), and earnings of non-residents from investment in resident equity and debt securities. Different from investors making direct investment, portfolio investors in such equity and debt securities have no lasting interest or influence in the management of the companies they invest. 

OII refers to interest inflow from, and outflow to, non-residents arising from other financial claims and liabilities that are not classified as DII or PII. Examples of these claims and liabilities include non-marketable loans, currency and deposits, trade credit and financial leases. Interest income receivable and payable are net of the financial intermediation services. The value of the financial intermediation services is indirectly measured using the "reference rate" method. 

CE refers to labour income earned by non-residents from their employment within the economic territory of Hong Kong and labour income earned by residents from their  employment outside the economic territory. It comprises wages, salaries and other remuneration whether paid in cash or in kind.

Balance of Payments Statistics

The Balance of Payments (BoP) account, International Investment Position (IIP) and External Debt (ED) statistics are compiled and disseminated in accordance with the requirments stipulated in the Special Data Dissemination Standard of the International Monetary Fund (IMF). While quarterly BoP account is compiled as from the reference period of the first quarter of 1999, annual BoP account can be dated back to the reference period of 1998. Furthermore, annual IIP statistics are compiled as from the reference period of 2000, whereas quarterly ED statistics are compiled as from the reference period of the first quarter of 2002. BoP data are useful for analysis of the external transactions of an economy. This is of particular importance for Hong Kong as a major international financial centre and a highly externally oriented economy.

The concept of "resident" is crucial to the compilation of BoP statistics. Practically, residents of an economy include individuals and organisations. According to international statistical standards, for individuals, residents refer to those who normally stay in the economic territory of the economy, irrespective of their nationality. For organisations, residents refer to those which ordinarily operate in the economic territory. The economic territory of an economy consists of the geographic territory administered by the government within which persons, goods and capital circulate freely. Conceptually, the residence status of individuals and organisations depends on their centre of economic interest.

Data on transactions and assets and liabilities vis-a-vis the mainland of China are treated as external transactions and external positions respectively. Examples of external transactions are trade in goods, trade in services and external factor income flows. Examples of external positions are stocks of inward and outward direct investments by major countries/territories.

Balance of Payments Account

A Balance of Payments (BoP) account is a statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world.

The BoP accounts of Hong Kong are compiled in accordance with international standards and practices as stipulated in the Fifth Edition of the Balance of Payments Manual (BPM5) published by the IMF. A complete BoP account comprises the following two broad accounts: (a) current account; and (b) capital and financial account.

Current Account 

Current account largely measures flow of real resources including exports and imports of goods and services, income receivable and payable abroad, and current transfers from and to abroad. Current account transactions are recorded on a gross basis, reflecting the provision and acquisition of real resources by an economy to and from other economies.

Goods comprise all movable goods that change ownership from residents to non-residents (exports) and from non-residents to residents (imports). Goods cover general merchandise, goods for processing, goods procured in ports by carriers, repairs on goods, and non-monetary gold.

Services include services rendered by residents to non-residents (exports) and by non-residents to residents (imports). Service transactions are classified by type of services, namely transportation, travel, insurance services, financial services and other services.

Income consists of earnings by residents from non-residents (income receivable) and by non-residents from residents (income payable) for the provision of factors of production. Income is mainly classified into compensation of employees and investment income which includes direct investment income, portfolio investment income and other investment income.

Current transfers are transactions in which residents of an economy provide/receive real and financial resources that are likely to be consumed immediately or shortly, to/from non-residents without the receipt/provision of equivalent economic values in return. Current transfers are unilateral in nature and they are offsetting entries in the BoP account for one-sided transactions. They include workers' remittances, donations, official assistance and pensions, etc.

Capital and Financial Account

Capital account measures external transactions in capital transfers, and in acquisition or disposal of non-produced, non-financial assets.

Capital transfers are transfers of ownership of a fixed asset or the forgiveness of a liability without receiving any economic value in return. Cash transfers that are linked to, or conditional on, the acquisition or disposal of a fixed asset are also capital transfers. Capital transfers consist mainly of debt forgiveness and migrants' transfers. Migrants' transfers are contra-entries to flows of goods and changes in financial items that arise from the migration of individuals between two economies.

Acquisition or disposal of non-produced, non-financial assets comprises transactions associated with tangible assets that are not actually produced and transactions associated with non-produced intangible assets. Non-produced, non-financial assets include land and subsoil assets, patents, copyrights and franchises, etc.

Financial account records transactions in financial assets and liabilities between residents and non-residents. It shows how an economy's external transactions are financed. Transactions in the financial account are classified into direct investment, portfolio investment, financial derivatives, other investment and reserve assets.

Net changes in capital and financial non-reserve assets refers to transactions in capital transfers and transactions in external investments other than reserve assets, viz. transactions in direct investment, portfolio investment, financial derivatives and other investment. Net change in financial non-reserve assets refers to transactions in external investments other than reserve assets.

For a reference period, if an economy receives more foreign currencies than it pays in external transactions in goods, services, income and assets, as well as in external transfers and remittances, then it is said to have a BoP surplus, which is equal to its overall net inflow of funds from the rest of the world. Conversely, there will be a BoP deficit which is equal to its net outflow of funds.

International Investment Position Statistics

An economy's International Investment Position (IIP) is a balance sheet of the stock of its external financial assets and liabilities at a particular point in time. In IIP, assets pertain to possessions, in the form of prescribed investment instruments, having commercial or exchange value that are owned by residents with claims on non-residents, whereas liabilities refer to those which are owed by residents with obligations to non-residents.

IIP statistics of Hong Kong are compiled in accordance with international standards and practices as stipulated in the Fifth Edition of the Balance of Payments Manual (BPM5) published by the IMF.

Fully consistent with the BoP financial account, IIP is categorised by type of investment. Assets and liabilities are divided into direct investment, portfolio investment, financial derivatives, other investment. The asset side of IIP also includes the reserve assets. The difference between assets and liabilities represents the net international investment position.

While BoP financial account measures transactions in external financial assets and liabilities during a period, IIP statement reflects the level of such assets and liabilities at the end of the period. The former is a flow concept and the latter a stock one.

Transactions in assets and liabilities, among other factors, will affect the stock of these assets and liabilities. In addition to transactions, price changes and exchange rate variations as well as other adjustment also have an impact on the value of stock of an economy's external financial assets and liabilities when expressed in the currency of the host economy.

Price and exchange rate variations affect the valuation of components such as equity and debt securities. Price variations reflect the holding gains or losses of such securities during the reference period. In estimating the price variations of equity and debt securities, data on individual share prices for equity securities listed on the Stock Exchange of Hong Kong and market indices for those listed in overseas stock and debt markets are used. As regards exchange rate variations, estimations are based on exchange rates of relevant currencies.

In accordance with international statistical standards, other adjustments include reclassifications and unilateral cancellation of debt by a creditor etc.

External Debt Statistics

Gross External Debt (ED), at any time, is the outstanding amount of those actual current, and not contingent, liabilities that are owed to nonresidents by residents of an economy, and require payment(s) of principal and/or interest by the debtor at some point(s) in the future.

Contingent liabilities are not included in ED. Contingent liabilities are commitments to undertake certain responsibilities in case some well defined conditions are fulfilled. For a liability to be included it must be actually existing and be outstanding. Debt includes arrears of principal and interest. Commitments to provide economic value in the future generally do not establish claims until and unless ownership of items are changed, services are rendered, or income accrues.

ED statistics of Hong Kong are compiled based on the External Debt Statistics: Guide for Compilers and Users published by the Inter-Agency Task Force on Finance Statistics chaired by the IMF.

In presenting the ED position, the data are classified by four sectors (general government, the monetary authority, banks and other sectors), followed by term of original maturity (long- and short-term), and by instrument (bonds and notes, money market instruments, loans, currency and deposits, trade credits, and other debt liabilities). Inter-company lending between entities in a direct investment relationship is separately presented.

Long-term debt is defined as debt with a maturity of more than one year or with no stated maturity. Short-term debt is debt payable on demand or with a maturity of one year or less.

According to international definition, shares and other equity participation, and financial derivatives that are owed to non-residents are excluded from ED as they do not require the payment of principal or interest. Nonetheless, an overdue obligation to settle a financial derivatives contract would, like any arrears, be a debt liability because a payment is required.

While a BoP account records economic transactions occurred during a period, ED reflects the level of non-equity liabilities at the end of the period. The former is a flow concept whilst the latter is a stock one.

Transactions are economic flows during a specific time period. On the other hand, stocks are positions in, or holdings of, assets and liabilities at a point in time. While stocks are resulted from the accumulation of prior transactions (i.e. flows), other changes such as valuation changes also affect the stock position at a particular time point.

For ED, changes on debt stocks in a period may also differ from that implied by debt flows during the period as the former may involve changes in stocks that do not entail flows. Examples on such changes include: write-off of bad debts, reclassifications of external debt such as when entities switch from one institutional sector to another, and other valuation changes resulted from market or external forces.