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What is GDP, how is it measured and why is it important?
April 26, 2011
Updated June 12, 2024
Gross domestic product (GDP) is an important tool for measuring the performance of a country’s economy.
It allows governments to determine how much they can tax and spend, and helps companies decide whether to hire more people.
What is GDP and how is it calculated?
GDP is a measure of all 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 numbers – covering three months at a time – are considered more important.
Most economists, politicians and businesses like to see GDP increase steadily.
This is because it usually means that people are spending more, additional jobs are created, more taxes are 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.
What is the UK’s current GDP?
According to the ONS, the economy failed to grow in April as rainy weather affected consumer spending. This was down from 0.4% in March.
This growth meant the UK emerged from the recession it entered at the end of 2023, when the economy shrank in the final two quarters of the year.
How does GDP affect me?
If GDP is rising steadily, people pay more taxes because they earn and spend 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 reverse.
Governments tend to receive less money in taxes, which means they can decide to freeze or cut public spending. Or taxes could 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:
- Exit: The total value of goods and services produced by all sectors of the economy – agriculture, manufacturing, energy, construction, service sector and government
- Expense: The value of goods and services purchased by households and the government, investment in machinery and buildings – this also includes the value of exports, minus imports
- Income: The value of income generated, mainly in terms of profits and wages
In the UK, the ONS publishes a single measure of GDP, which is calculated using all three measures.
But the initial estimates mainly use the production measure, using data collected from thousands of companies.
Image source, Getty Images
Why does the value of GDP change frequently?
The UK produces one of the fastest GDP estimates of the major economies, around 40 days after the quarter in question.
At this stage, only around 60% of the data is available, so the value is revised as more information arrives.
What are the limitations of the GDP value?
- Hidden savings: Unpaid work, such as caring for children or elderly relatives, is not captured
- Inequality: GDP growth also does not show how income is divided among a population – GDP growth may result from the richest becoming richer, rather than everyone being better off.
What is GDP per capita?
Just because GDP is increasing does not mean that an individual’s standard of living is improving.
If a country’s population increases, this increases GDP, because with more people, more money will be spent.
But people in that country may not be getting richer. They may be getting poorer, on average, even as GDP increases.
The ONS also publishes a figure for GDP per capita – or number of inhabitants – which may tell a different story.
In fact, when we exclude 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 in the same period in 2023.
Image source, Getty Images
Image caption, 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 ONS also measured well-being along with economic growth. This assesses people’s health, relationships, education and skills, as well as their personal finances and the environment.
But, despite its limitations, GDP is still the most used measure for most government decisions and international comparisons.