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, 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?

It grew by 0.1%, boosted by production and manufacturing, in areas such as the car industry.

This followed a 0.3% rise in January, offering hope that the UK is on its way out of the recession that came at the end of 2023.

How does GDP affect me?

The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.

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.

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

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.

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 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 is GDP and how is it measured? ›

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's economic health.

Why does it matter what our GDP is? ›

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.

Which is a better measure of GDP explain your answer? ›

Real GDP is a better indicator of economic growth because it can be compared with base year GDP. While nominal GDP cannot be compared to any previous year's GDP.

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.

How do you measure GDP examples? ›

GDP = consumption + investment + government spending + net exports. In this case, $200 million + 55 million + $120 million + $80 million + $45 million = $500 million. Then imports of $50 million is subtracted to get GDP = $450 million.

How to measure GDP growth? ›

To calculate the growth rate for both nominal and real GDP, two data years are needed. The GDP of year 2 is divided by the GDP of year 1 and the answer is subtracted by one. That is, Growth Rate = (GDP_Year2/ GDP_Year 1) - 1.

What is more important than GDP? ›

Gross National Product (GNP)

While GDP is an indicator of the local/national economy, GNP represents how its nationals are contributing to the country's economy.

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.

Why is GDP so strong? ›

Growth was in large part due to an increase in Americans making and spending more. In addition, the economy added 2.7 million jobs in 2023. Consumer confidence continues to remain strong. Today's report shows consumer spending in both goods and services beat expectations in both November and December.

How do you measure the economy? ›

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.

Why is GDP not a good measure of well-being? ›

GDP is an indicator of a society's standard of living, but it is only a rough indicator because it does not directly account for leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the ...

Is GDP the best way to measure development? ›

Economic growth, measured popularly via GDP, is a complementary indicator to development, but not an adequate indicator when considered on its own. The challenge of modern capitalism is to balance its role as an efficient and effective mode of production with its tendency to concentrate income, wealth and, thus, power.

Why GDP is the wrong tool for measuring what matters? ›

In truth, "GDP measures everything," as Senator Robert Kennedy once said, "except that which makes life worthwhile." The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life.

What is the most important limitation of GDP? ›

GDP does not directly take account of leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that society may place on certain types of output.

What are the four main limitations of GDP? ›

Limitations of using GDP as an indicator are as follows:
  • (i) Non monetary exchanges. GDP measures the goods and services produced in an economy during a particular period of time. ...
  • (ii) Inflation. GDP does not take into account the level of prices in a country. ...
  • (iii) Externalities. ...
  • (iv) Income pattern.

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? ›

1. United States
  • GDP – Nominal: $20.89 trillion.
  • GDP per Capita: $63,413.
  • GDP – Purchasing Power Parity (PPP): $20.89 trillion.

What is GDP measured in quizlet? ›

GDP measures the value of total production, total income, and total expenditure. The value of the final goods and services produced in a given year expressed in terms of the prices of that same year. A good or service that is produced for its final user and not as a component of another good or service.

How often is GDP measured? ›

BEA estimates the nation's GDP for each year and each quarter. But new GDP statistics are released every month.


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