May 19, 2024

What is GDP, how is it measured, and what is its importance?

Gross Domestic Product (GDP) is an important tool to measure the performance of a country’s economy.

It allows governments to decide how much they can afford to tax and spend, and helps companies decide whether to hire more people.

What is GDP and how is it achieved?

GDP is a measure of all the economic activities of businesses, governments, and individuals in a country.

In the UK, the Office for National Statistics (ONS) publishes new GDP figures every month. However, quarterly figures – covering three months at a time – are more important.

Most economists, politicians and businesses like to see GDP rising steadily.

This is because it usually means people spend more, additional jobs are created, more taxes are paid, and workers get better pay increases.

When GDP falls, it means the economy is contracting – which can be bad news for businesses and workers.

What is the current GDP of the UK?

It grew by 0.6%, supported by the services sector, such as retail, hospitality, and public transportation.

This means that the UK has emerged from the recession it entered at the end of 2023, when the economy contracted in the last two quarters of the year.

How does GDP affect me?

When GDP rises steadily, people pay more taxes because they earn and spend more.

When the economy contracts and a country enters a recession, these things can go into reverse.

Governments tend to get less money from taxes, which means they may decide to freeze or reduce public spending. Or taxes may increase.

In 2020, the Covid pandemic caused the UK’s most severe recession in more than 300 years, forcing the government to borrow hundreds of billions of pounds to support the economy.

How is GDP measured?

GDP can be measured in three ways:

  • production: The total value of goods and services produced by all sectors of the economy – agriculture, manufacturing, energy, construction, the service sector, and government
  • Expenses: The value of goods and services purchased by households and the government, and investment in machinery and buildings – this also includes the value of exports minus imports
  • Enter: The value of income generated, most of which is from profits and wages

In the United Kingdom, the Office for National Statistics publishes a single measure of GDP, which is calculated using all three measures.

But early estimates mainly use a measure of production, using data aggregated from thousands of companies.

Image source, Getty Images

Why does the GDP number change so often?

The UK produces one of the fastest GDP estimates of major economies, about 40 days after the quarter in question.

At that point, only about 60% of the data is available, so the number is refined as more information comes in.

What are the limits of the GDP number?

  • inequality: GDP growth also doesn’t show how income is divided among the population – a rise in GDP can result from the rich getting richer, rather than everyone becoming better off

What is GDP per capita?

Just because GDP increases, does not mean that an individual’s standard of living is improving.

When a country’s population increases, it causes its GDP to rise, because with a larger population, more money will be spent.

But individuals within this country may not become richer. They may get poorer on average, even as GDP rises.

The Office for National Statistics also publishes a figure for GDP per capita – or head of population – which can tell a different story.

In fact, if we exclude inflation and population growth, the latest figures show that per capita GDP was 0.7% lower than it was one year ago.

In other words, each of us was on average £100 worse off than we were two years ago.

Image source, Getty Images

Comment on the photo, Official GDP figures do not take into account unpaid work such as childcare

Alternative measures have been developed that attempt to capture this.

Since 2010, The Office for National Statistics also measured well-being In addition to economic growth. This assesses health, relationships, education and skills, as well as people’s personal finances and the environment.

But despite the limitations imposed by GDP, it is still the most widely used measure for most government decisions and international comparisons.