What is GDP, how is it measured and why does it matter? (2024)

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What is GDP, how is it measured and why does it matter? (1)

Gross domestic product (GDP) is an important tool for measuring how a country's economy is doing.

It lets governments work out how much they can afford to tax and spend, and helps businesses decide whether to hire more people.

What is GDP and how is it worked out?

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. However, quarterly figures - covering three months at a time - are considered more important.

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

That's 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.

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?

According to the ONS, the economy failed to grow at all in April as wet weather affected consumer spending. That was down from 0.4% in March.

The most recent quarterly figure, covering the first three months of 2024, was 0.7%, thanks to strong spending on services such as such as retail, hospitality and public transport. The figure was revised up from the first estimate of 0.6%.

This growth meant that the UK exited the recession it entered at the end of 2023, when the economy shrank in the last two quarters of the year.

How does GDP affect me?

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.

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.

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.

How is GDP measured?

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 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 imports

  • Income: 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.

But early estimates mainly use the output measure, using data collected from thousands of companies.

Image source, Getty Images

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.

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, external.

What are the limitations of the GDP figure?

  • Hidden 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 off

What is GDP per capita?

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.

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.

In fact, when you strip out inflation and population growth, the latest quarterly figures show that in the first three months of 2024, GDP per capita was 0.7% lower than for the same period in 2023.

Image source, Getty Images

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.

Since 2010, the ONS has also measured well-being, external alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.

Related Topics

  • Economics
  • GDP
  • UK economy
What is GDP, how is it measured and why does it matter? (2024)

FAQs

What is GDP, how is it measured and why does it matter? ›

GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within the borders of a country.

What does GDP measure and why is it important? ›

Understanding Gross Domestic Product (GDP)

GDP measures the monetary value of goods and services produced within a country's borders in a given time, usually a quarter or a year. Changes in output over time as measured by the GDP are the most comprehensive gauge of an economy's health.

What is the simple definition of GDP? ›

GDP stands for "Gross Domestic Product" and represents the total monetary value of all final goods and services produced (and sold on the market) within a country during a period of time (typically 1 year). Purpose.

What is the real GDP and why is it important to calculate? ›

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Real GDP is expressed in base-year prices. It is often referred to as constant-price GDP, inflation-corrected GDP, or constant-dollar GDP.

What is GDP Gross Domestic Product everfi? ›

GDP measures the total value of all the finished goods and services produced in a country over a certain period of time.

Why does GDP fail as a measure of well-being? ›

GDP includes what is spent on environmental protection, healthcare, and education, but it does not include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier.

How is the economy measured? ›

Gross Domestic Product (GDP), a widely used indicator, refers to the total gross value added by all resident producers in the economy. Growth in the economy is measured by the change in GDP at constant price.

How do you explain GDP simply? ›

Gross domestic product (GDP) is the most common measure for the size of an economy, and it measures the value of total final output of goods and services produced by that economy in a certain period of time.

How do you explain GDP to a child? ›

Gross domestic product, or GDP, is a measure used to evaluate the health of a country's economy. It is the total value of the goods and services produced in a country during a specific period of time, usually a year.

What GDP really means? ›

Gross domestic product is the monetary value of all finished goods and services made within a country during a specific period.

How do you measure GDP and economic growth? ›

GDP, the most popular way to measure economic growth, is calculated by adding up all of the money spent by consumers, businesses, and the government in a given period. The formula is: GDP = consumer spending + business investment + government spending + net exports.

What is GDP and how to calculate? ›

Accordingly, GDP is defined by the following formula: GDP = Consumption + Investment + Government Spending + Net Exports or more succinctly as GDP = C + I + G + NX where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures ...

How is GDP data collected? ›

from agencies that survey people or businesses to track employment, prices or trade. Other data come as byproducts of government functions such as collecting taxes, paying Social Security benefits or managing the federal budget. provide specialized sales data on products like prescription drugs or cars.

Why is GDP important? ›

GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

What are the main components of measuring GDP with what is demanded? ›

GDP measured by components of demand

Consumer spending, or consumption. Business spending, or investment. Government spending on goods and services. Spending on net exports.

What is GDP and why is it important what are the limitations of GDP? ›

GDP is a useful indicator of a nation's economic performance, and it is the most commonly used measure of well-being. However, it has some important limitations, including: The exclusion of non-market transactions. The failure to account for or represent the degree of income inequality in society.

Why is the gross national product important? ›

Because GDP omits international income from the total, it allows the fiscal and monetary policy makers to more accurately track total output of goods and services from year to year, as well as compare output among nations.

What is GDP per capita and why is it important? ›

Gross domestic product (GDP) per capita is an economic metric that breaks down a country's economic output to a per-person allocation. Economists use GDP per capita to determine the prosperity of countries based on their economic growth. GDP per capita is calculated by dividing the GDP of a nation by its population.

Why is economic growth important? ›

Economic Growth is important because it is the means by which we can improve the quality of our standard of living . It also enables us to cater for any increases in our population without having to lower our standard of living.

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