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:
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.
You can see the latest GDP data on the Office for National Statistics Opens in a new window (ONS) website, as well as a useful guide Opens in a new window to GDP.
Most read
Topics
Back to top
As an economics expert with a deep understanding of GDP and economic concepts, let's delve into the key points mentioned in the article about GDP.
Gross Domestic Product (GDP): GDP is a fundamental measure of the size and health of a country's economy over a specific period, usually a quarter or a year. It serves as a tool to compare the economic sizes of different countries at different points in time.
Calculation of GDP: The article highlights that GDP can be calculated in three ways:
-
Total value of goods and services produced ('output'): This includes everything produced within the country's borders.
-
Everyone's income: GDP can also be estimated by adding up the incomes earned by everyone in the country, providing a perspective on the distribution of wealth.
-
Total spending: This involves adding up all expenditures within the country, such as household spending, business investments, and government expenditures. Household spending, forming the largest part, accounts for about two-thirds of GDP.
It's important to note that these three methods provide different figures due to the inherent challenges of obtaining complete economic data.
GDP Growth and Economic Strength: When GDP increases, it indicates economic growth. This growth, also referred to as economic growth, is a key measure of the overall strength of the economy. Increased spending and potential business expansions contribute to this growth.
Limitations of GDP: The article rightly points out that GDP growth doesn't provide the complete story of economic well-being. Several important aspects are not captured by GDP:
-
Value not involving money transactions: Activities like caring for an elderly relative, which hold significant value but involve no monetary transactions, are not reflected in GDP.
-
Income distribution: GDP doesn't reveal how evenly income is distributed among the population, leaving the possibility of growth benefiting only a specific segment.
-
Population growth impact: Changes in the size of the population can affect the per-person income calculation. For instance, if GDP rises by 2% but the population grows by 4%, average income per person may actually decline.
-
Non-welfare enhancing activities: Certain activities that contribute to GDP, such as war or environmental degradation, may not make the country better off in terms of overall well-being.
Wider Measures of Well-Being: Recognizing that GDP is just one measure, the article mentions that the Office for National Statistics (ONS) collects data on broader measures of personal and societal well-being. These include health, relationships, education, skills, environment, and more. Other organizations, like the Happy Planet Index, provide alternative metrics to assess the well-being and happiness of nations.
In conclusion, understanding GDP goes beyond its numerical value, and considering broader measures is crucial for a comprehensive evaluation of a country's economic health and the well-being of its citizens.
