Basically, GDP is a tool used to assess the size and health of an economy.
It stands for gross domestic product and measures the monetary value of final goods and services produced in the country over a given period.
Generally, if GDP is growing, and inflation is in check, it’s a strong sign that the economy is doing well, with more jobs and better wages available, and people spending more money.
If it’s falling, it signals the economy is doing badly, often bringing with it lower incomes and job cuts.
Governments, businesses and economists monitor GDP growth among other indicators to understand where the economy stands – and where it’s headed.
How is it measured?
GDP can be measured in three ways:
- Output – the value of goods and services produced by all sectors of the economy – construction, retail, manufacturing etc;
- Expenditure – money invested by businesses and spending by households and the government;
- Income – the total value of income generated by the production of goods and services in terms of company profits and employee benefits.
Output is the most often cited of the three, as it is the measure with the best information available to the Office for National Statistics (ONS).
The ONS, the UK’s largest statistics authority, publishes GDP figures every month – one of only a small number of countries to do so. However, the monthly data is more volatile, meaning the quarterly figures, which cover three-month periods, are seen as more important.
That’s what we’re getting this morning.
What does GDP not include?
GDP is an important tool, but it’s not perfect.
The International Monetary Fund cautions there are some things that GDP does not reveal, such as the overall standard of living or wellbeing of the country.
It points out that the quality of life can depend on how wealth is distributed among residents, and not just the overall level. Higher output may also come at the expense of leisure time or the running down of non-renewables, it notes.
GDP also excludes any unpaid work, such as childcare or looking after elderly relatives.
One of the best measures of living standards is GDP per capita – which reflects economic growth per head of the population. This also takes into account the effects of migration.
No growth can lead to recession
If GDP falls for successive three-month periods (quarters), the UK is in a technical recession.
During a recession, there’s less money circulating: less money for workers from their employers, less money being spent in shops and restaurants, and less money going to the government in tax from wages to pay for things like benefits and public services.
