What is GDP?

Perhaps the most talked about economic concept. But what is it and how do we measure it?
This page was last updated on 10 January 2019
Gross domestic product or GDP is perhaps the most talked about economic concept. It measures the size of a country’s economy. This guide explains how GDP is measured, as well as which things GDP doesn’t capture.

What is GDP?

Gross domestic product or GDP is a measure of the size and health of a country’s economy over a period of time (usually one quarter or one year). It is also used to compare the size of different economies at a different point in time.

How is GDP calculated?

To measure GDP each quarter, the Office for National Statistics (ONS) collects data from thousands of UK companies. And to complicate matters, there are three ways to measure GDP! You can calculate it by adding up, for everyone in the country:

  • The total value of goods and services (‘output’) produced;
  • Everyone’s income;
  • Or what everyone in the country has spent.

As this ONS guide explains, these are three ways to estimate the same thing. You get different figures depending on which method you use because there’s never enough data to build a picture of the economy that’s 100% complete.

The last measure, total spending, is perhaps the most familiar and can be broken down as:

What is GDP - 1

Household spending forms the biggest part, accounting for about two thirds of GDP. Meanwhile, a business buying new equipment or a construction company building houses are examples of investment.

So when you hear talk of a country’s ‘output’, ‘expenditure’ or ‘income’, these are all ways to measure GDP.

When GDP goes up, the economy is growing – people are spending more and businesses may be expanding.

For this reason, GDP growth – also called economic growth or simply “growth” – is a key measure of the overall strength of the economy.

What’s not captured in GDP statistics?

GDP growth, however, is not the whole story when gauging how well economies are doing.

To begin with, some things have a lot of value but are not captured in GDP because no money changes hands. Caring for an elderly relative would be one example of this. As Einstein once said, “Not all that can be counted counts”.

GDP also doesn’t tell us anything about how evenly income is split across the population. Growth could mean everyone becoming better off or just the richest segment getting even richer. In practice it usually lies somewhere between the two.

Next, it helps to bear in mind changes in the size of the population. If UK GDP rose by 2% next year, but the population grew by 4%, then average income per person would actually have fallen.

Finally, there are things which raise GDP that don’t make the country better off. War is one example (a lot of money is spent, so GDP goes up). Or if a large chunk of the Amazon rainforest was cut down in one week, then you’d get a sharp rise in GDP from the sales of timber but at huge environmental cost.

What are wider measures of well-being?

Because GDP is only one measure of the health of the economy, the ONS also collects data on broader measures of personal and societal well-being.

These include things like health, relationships, education and skills, what we do, where we live, our finances and the environment.

Other organisations look at other metrics of well-being and happiness. The Happy Planet Index (produced by the New Economic Foundation), for instance, gives a measure of how well nations are doing at achieving long, happy and sustainable lives.

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