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 0.6%, thanks to strong spending on services such as such as retail, hospitality and public transport.

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)


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? ›

Gross domestic product tracks the health of a country's economy. It represents the value of all goods and services produced over a specific time period within a country's borders. Economists can use GDP to determine whether an economy is growing or experiencing a recession.

What is GDP in simple terms? ›

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.

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 does GDP stand for and what does it measure why is GDP adjusted? ›

The value of the final goods and services produced in the United States is the gross domestic product. The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing.

How is the GDP calculated? ›

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 economic growth measured? ›

Economic growth refers to an increase in the size of a country's economy over a period of time. The size of an economy is typically measured by the total production of goods and services in the economy, which is called gross domestic product (GDP). Economic growth can be measured in 'nominal' or 'real' terms.

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 country has the highest GDP? ›

With a GDP of more than 20 trillion dollars, the United States of America is the world's largest economy.

How to increase GDP? ›

Multiple factors working together typically are what impact economic growth, which often is reflected in GDP growth and GNP growth. There are numerous strategies governments might use to try and stimulate economic growth, such as tax breaks or tax rebates, deregulation, and investment in infrastructure.

Is low GDP good or bad? ›

Increasing GDP is a sign of economic strength, and declining GDP indicates economic weakness. GDP can offer false information when it results from economic destruction—such as a car accident or natural disaster—rather than truly productive activity.

Why is real GDP more important? ›

Why Do Economists Favor Real GDP? Real GDP is often favored over nominal GDP as it accounts for the effects of inflation. Thus, if nominal GDP grew at 4% in a given year, but the inflation rate was 5%, it actually shrunk by 1% in real (constant-dollar) terms.

What is an example of GDP? ›

GDP = the total market value of the final goods and services produced within the United States in a year. A good is a video game, a car, an apple, a gold ring. Goods are things that people make, grow or extract from the land. A service is a haircut, a bus ride, computer repair, a doctor's care.

Why is GDP important and what does it measure? ›

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.

What is a simple definition of GDP? ›

Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports).

Why is GDP an inaccurate measure? ›

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.

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.

What is the importance of GDP quizlet? ›

The GDP measure is an important indicator that shows how well an economy is performing. It multiplies the prices of finalized goods and services with their total production. Every country strives for more economical output that shows their overall growth.

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 increases state capacity and the supply of public goods. When economies grow, states can tax that revenue and gain the capacity and resources needed to provide the public goods and services that their citizens need, like healthcare, education, social protection and basic public services.

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