We can see that their trends and fluctuations are normally the same. In this report, we describe how this Fixed-linkage System affects the Hong Kong economy, the stock markets and the property markets.
Hong Kong Economy
To measure the economic condition of Hong Kong throughout the 15 years, Gross Domestic Product (GDP) is the indicator we used.
GDP is defined as ‘the market value of all final goods and services produced within a country in a given period of time.’ (#1) It measures the total spending on goods and services in all markets in the economy.
GDP (Y) is constituted by four elements, namely Consumption ( C ), Investment (I), Government Purchases(G), and the Net Exports(NX); Their relationships are denoted by the following equation:
Y = C + I + G + NX
Consumption is the households’ spending on goods and services except housing;
Investment is the spending on goods which will be used to produce more goods and services; Government Purchase is the expenditure on goods and services by the local government;
Net Exports is the difference between the exports and the imports.
Chain Volume Measures of GDP is a more accurate measure of GDP using effective average volume for the goods and services produced by a region in a given period of time.
Unemployment rate is another good indicator showing the economic condition of a region since a better economic environment requires a larger production and also the labor forces.
Effect of Federal Fund Interest rate of U.S. to Hong Kong economy
|[pic] |The investment is deduced by the sum of the Gross | |Graph 2 |domestic fixed capital formation and the Changes in | | |inventories. | | |Lowering the interest rate increases the incentive to | | |borrow and invest. This improves the Investment (I) and | | |thus GDP. Lowering the interest rate helps the Hong Kong | | |economy. | | |In reality, the relation between investment and interest | | |rate is fairly an inversely proportion, i.e. similar to | | |what theory predicted, especially when we look at year | | |94-95, 99-01. | |[pic] |The change of net exports of Hong Kong is directly | |Graph 3 |proportional to that of interest rate. Lower interest | |...