GDP (gross domestic product) is an important tool for determining whether an economy is doing well or poorly.
This allows governments to calculate how much they can tax and spend, and helps companies decide whether to expand and hire more people.
What is GDP?
GDP is a measure of all economic activity of a country's businesses, government, and individuals.
In the UK, new GDP statistics are published every month by the Office for National Statistics (ONS), but the quarterly figures, which cover three months at a time, are considered more important.
If the economy is growing, each quarter's GDP number will be slightly larger than the previous three months.
Most economists, politicians, and businesses want GDP to rise steadily. Because that usually means people spend more, additional jobs are created, more taxes are paid, and workers get better wages.
A falling GDP means the economy is shrinking, which is bad news for businesses and workers.
The coronavirus pandemic has caused the deepest recession in more than 300 years, forcing governments to borrow hundreds of billions of pounds to support the economy.
In 2022, UK GDP reached £2.2 trillion, but we tend to focus on how much it has grown rather than the total amount.
What is the current growth rate in the UK?
In January 2023, Chancellor Rishi Sunak pledged “economic growth”. This condition will be met if GDP for the three months from October to December 2023 is larger than the previous quarter (July to September).
How does GDP affect me?
Governments can use GDP growth as evidence of successful economic management. Similarly, when GDP declines, opposition politicians claim that the government is badly run.
But this is more than just a report on the government's economic performance.
If GDP is steadily rising, people will earn more and spend more, so they will pay more taxes. This means the government will have more money to spend on public services such as schools, police and hospitals.
The government also wants to monitor the amount of borrowing in relation to the size of the economy.
For example, in the first year of the COVID-19 pandemic, borrowing amounted to about 14% of GDP, the highest proportion since World War II.
How is GDP measured?
GDP can be measured in three ways.
- output: the total value of goods and services produced by all sectors of the economy (agriculture, manufacturing, energy, construction, service sector, government)
- Spending: The value of goods and services purchased by households and governments, investments in machinery and buildings – this also includes the value of exports less the value of imports.
- income: the value of the income generated, primarily in terms of profits and wages
In the UK, the ONS publishes a single GDP measure calculated using all three measures.
But early estimates mainly measure output and use data collected from thousands of companies.
Why do GDP numbers change so often?
The UK is the first major country to release gross domestic product (GDP) estimates about 40 days into the quarter.
At this stage, only about 60% of the data is available, so this figure will be revised as more information comes in.
What are the limitations of GDP numbers?
- Hidden economy: Unpaid work such as caring for children or elderly relatives is not captured.
- inequality: Also, GDP growth does not show how income is distributed across the population – the rise in GDP does not mean that everyone is better off, but that the richest people are getting richer. may be the result
Just because GDP is increasing does not mean that the standard of living of individuals is improving.
When a country's population increases, more money is spent, thus pushing up the GDP.
But individuals in that country may not be getting richer. Even though GDP is rising, people may be poorer on average.
The ONS also publishes figures for GDP per capita, or GDP per head of population, which may tell a different story.
Alternative measures have been developed to try to capture this.
Since 2010, the ONS has also measured happiness alongside economic growth. It assesses people's personal finances and circumstances, as well as their health, relationships, education, and skills.
In 2019, then-New Zealand Prime Minister Jacinda Ardern announced the country's first-ever welfare budget, which prioritized health and life satisfaction over economic growth.
However, despite its limitations, GDP remains the most widely used measure in most government decisions and international comparisons.