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What is GDP and how is it measured? What is GDP, how is it measured and why does it matter?
(14 days later)
Gross domestic product (GDP) is an important tool for judging how well, or badly, an economy is doing. Gross domestic product (GDP) is an important tool for measuring how a country's economy is doing.
It lets the government work out how much it can afford to tax and spend, and helps businesses decide whether to expand and hire more people. It lets governments work out how much they can afford to tax and spend, and helps businesses decide whether to hire more people.
The latest figures confirm the UK economy fell into recession at the end of 2023, after GDP fell in two successive three-month periods.
What is GDP and how is it worked out?What is GDP and how is it worked out?
GDP is a measure of all the economic activity of companies, governments and individuals in a country. GDP is a measure of all the economic activity of companies, governments and people in a country.
In the UK, new GDP figures are published by the Office of National Statistics (ONS) every month, but the quarterly figures - covering three months at a time - are considered more important. In the UK, new GDP figures are published by the Office of National Statistics (ONS) every month. However, quarterly figures - covering three months at a time - are considered more important.
When an economy is growing, each quarterly GDP figure is slightly bigger than in the previous three-month period. Most economists, politicians and businesses like to see GDP rising steadily, because it usually means people are spending more, extra jobs are created, more tax is paid and workers get better pay rises.
Most economists, politicians and businesses like to see GDP steadily rising because it usually means people are spending more, extra jobs are created, more tax is paid and workers get better pay rises.
When GDP is falling, it means the economy is shrinking - which can be bad news for businesses and workers.When GDP is falling, it means the economy is shrinking - which can be bad news for businesses and workers.
If GDP falls for two quarters in a row, that is known as a recession, which can lead to pay freezes and job losses.If GDP falls for two quarters in a row, that is known as a recession, which can lead to pay freezes and job losses.
What is the UK's current GDP?What is the UK's current GDP?
According to the first official estimate, the UK economy picked up in January. It grew by 0.2%, boosted by stronger sales in shops and online and more construction activity. According to the first official estimate, the UK economy picked up slightly in February.
This followed a 0.1% fall in December, and the news that the economy went into recession at the end of 2023. It grew by 0.1%, boosted by production and manufacturing, in areas such as the car industry.
Higher prices squeezed consumers' budgets throughout 2023, and across the year as a whole, the economy grew 0.1%. This followed a 0.3% rise in January, offering hope that the UK is on its way out of the recession that came at the end of 2023.
Growing the economy was one of five pledges Prime Minister Rishi Sunak made in January 2023.
Faisal Islam: Should we care that the UK is in recession?Faisal Islam: Should we care that the UK is in recession?
Is Sunak keeping his five key promises?Is Sunak keeping his five key promises?
How does GDP affect me?How does GDP affect me?
The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.
But it's more than just a report card on the government's economic performance. If GDP is going up steadily, people pay more in tax because they're earning and spending more. This means more money for the government, which it can choose to spend on public services, such as schools, police and hospitals.
If GDP is going up steadily, people pay more in tax because they're earning and spending more. This means more money for the government that it can choose to spend on public services, such as schools, police and hospitals.
When the economy shrinks and a country goes into recession, these things can go into reverse.When the economy shrinks and a country goes into recession, these things can go into reverse.
Governments tend to get less money in tax, which means they may decide to freeze or cut public spending. Or taxes may rise.Governments tend to get less money in tax, which means they may decide to freeze or cut public spending. Or taxes may rise.
In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.
Government borrowing was equivalent to about 14% of the UK's total GDP in the first year of the pandemic, the highest proportion since World War Two.
How much money does the UK government raise and spend each year?How much money does the UK government raise and spend each year?
Where does the government borrow billions from?Where does the government borrow billions from?
How is GDP measured?How is GDP measured?
GDP can be measured in three ways:GDP can be measured in three ways:
Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and governmentOutput: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government
Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus importsExpenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports
Income: The value of the income generated, mostly in terms of profits and wagesIncome: The value of the income generated, mostly in terms of profits and wages
In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.
But early estimates mainly use the output measure, using data collected from thousands of companies.But early estimates mainly use the output measure, using data collected from thousands of companies.
Why does the GDP figure often change?Why does the GDP figure often change?
The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.
At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.
The ONS publishes more information about this on its website.The ONS publishes more information about this on its website.
What are the limitations of the GDP figure?What are the limitations of the GDP figure?
GDP doesn't tell the whole story:GDP doesn't tell the whole story:
Hidden economy: Unpaid work such as caring for children or elderly relatives isn't capturedHidden economy: Unpaid work such as caring for children or elderly relatives isn't captured
Inequality: GDP growth also doesn't show how income is split across a population - rising GDP could result from the richest getting richer, rather than everyone becoming better offInequality: GDP growth also doesn't show how income is split across a population - rising GDP could result from the richest getting richer, rather than everyone becoming better off
Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.
If a country's population increases, it pushes GDP up, because with more people, more money will be spent.If a country's population increases, it pushes GDP up, because with more people, more money will be spent.
But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.
The ONS also publishes a figure for GDP per capita - or head of population - which can tell a different story.The ONS also publishes a figure for GDP per capita - or head of population - which can tell a different story.
Official GDP figures don't take into account unpaid work like looking after childrenOfficial GDP figures don't take into account unpaid work like looking after children
Some critics also argue that GDP doesn't take into account whether the economic growth it measures is sustainable, or the environmental damage it might do.Some critics also argue that GDP doesn't take into account whether the economic growth it measures is sustainable, or the environmental damage it might do.
Alternative measures have been developed which try to capture this.Alternative measures have been developed which try to capture this.
Since 2010, the ONS has also measured well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.Since 2010, the ONS has also measured well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.
In 2019, then New Zealand PM Jacinda Ardern released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth.
But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.
Related TopicsRelated Topics
EconomicsEconomics
GDPGDP
UK economyUK economy