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P. 1 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
Examples
Example 1: Foreign Domestic Helper
A foreign domestic helper working in Hong Kong is regarded as a resident of Hong Kong.
Example 2: Branch of a Foreign Bank
A branch of a foreign bank operating in Hong Kong is defined as a resident organization.
Example 3: Short-term Contract Solicitor
A solicitor coming to Hong Kong to work on a short-term 3-term contract for a local
company is NOT regarded as a resident. The income earned by him is external factor income
outflow from Hong Kong to other economies in the form of compensation of employees (CE).
Example 4: Guest performer from an overseas TV station
A TV station in Hong Kong getting a guest performer from an overseas TV station to
perform in Hong Kong, the guest performer is NOT regarded as a resident. It is regarded as
purchases a service from overseas TV station, which is the employer of the performer. Here, an
‘import of service’is involved.
P. 2 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
In general, if a Hong Kong company creates a business entity outside the economic territory
of Hong Kong for the purpose of holding some assets in Hong Kong, the income generated by those
assets will be compiled as income out flow to the business entity, and then as income inflow from
the entity back to the final owner(s) of the investment.
(b) Portfolio investment income (PII) refers to earnings of residents from investment in
non-resident equities (i.e. stocks and shares), debt securities (e.g. negotiable certificates of deposits,
bonds and bills) and financial derivatives (e.g. interest rate swaps and forward rate agreements).
Compared with investors making direct investment, portfolio investors in equity and debt securities
of non-resident business enterprises have no lasting interest or influence in the management of the
companies they invest. A holding of less than l0% equity in a company is regarded as portfolio
investment.
The residence status of securities is determined by the legal domicile and place of
productive operation or the issuing company, irrespective of the place of listing. Therefore, shares
that are issued by resident companies are regarded as resident shares. In a Stock Exchange in an
economy, there may be both listings of resident and non-resident shares
(c) Other investment income (OII) refers to external flows of interest incomes derived from other
financial claims on and liabilities to non-residents that are not classified as DII or PII. Examples of
these claims and liabilities include short-term and long-term non- marketable loans, deposits,
financial leases and trade credit.
(d) Compensation of employees (CE) refers to labour income earned by non-residents from their
short-term employment within the economic territory of Hong Kong and labour income earned by
residents from their short-tern employment outside the economic territory of Hong Kong. It
comprises wages, salaries and other remuneration whether paid in cash or in kind.
For Hong Kong people who frequently travel to and from the mainland of China in their
work, they are regarded as Hong Kong residents, and their salaries are normally paid by companies
in Hong Kong. Therefore, the labour income they earn is not included in CE inflow. Also, those
employees who come from other economies to work in Hong Kong under the Importation of
Labour Scheme, or who have an employment contract of more than 12 months, are regarded as
Hong Kong residents according to international standards, and their labour income is accordingly
not included in CE outflow.
Some Hong Kong people work outside the economic territory of Hong Kong in the capacity
of freelance specialists (e.g. singers, lawyers, doctors). Usually they work as employees of Hong
Kong companies owned by themselves which are created for signing legal binding contracts with
non-residents and for receiving earnings. The earnings of these freelance specialists from outside
the economic territory of Hong Kong are treated as trade in services and are already covered in
GDP.
P. 3 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
P. 4 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
2.2.1 Rent
Rent refers to the income earned by the owner of natural resources (e.g. land) and properties. It
also includes royalties paid for patents and copyrights. For owner-occupied properties and their
rental values are estimated (imputed rental value) and included in GNP.
2.2.2 Wage
Wage refers to wage and salary supplements (including contributions to pension fund,
commissions, bonuses, housing allowances, rental value of staff quarters, etc.) earned by labour.
2.2.3 Interest
Interest refers to income earned by capital and equipment.
2.2.4 Profits
Profits can be divided into three parts: (i) dividends (i.e. profits distributed to shareholders), (ii)
retained earnings (i.e. undistributed corporate profits) and (iii) corporate profits tax.
! GNP at factor cost = GNP (at market prices) – indirect taxes + subsidies
GDP at factor cost = GDP (at market prices) – indirect taxes + subsidies
! Net National Product (NNP) = GNP – depreciation
P. 5 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
! Disposable (personal) income (DPI) = PI – income taxes (except corporate profit tax)
[Note: Disposable income is the total income that can be spent by citizens.]
! Per capita GNP = GNP ÷ Size of population
Per capita GDP = GDP ÷ Size of population
[Note: Real GDP is also known as GDP at constant price. Nominal GDP is also known as
GDP at current market price. GDP deflator is the weighted average of the price relatives
of all commodities comprising GDP. GDP deflator can also be found by dividing Nominal
GDP by Real GDP (i.e. GDP deflator = Nominal GDP ÷ Real GDP)]
P. 6 of 7
Notes on A-Level Macroeconomics: Introduction to Macroeconomics and National Income Accounting
P. 7 of 7