GDP (or Gross Domestic Product) is one of many tools that can be used to determine how well an economy is doing.
GDP is used by businesses to determine when they should expand or hire more people. It also allows the government to calculate how much to tax and what to spend.
What is GDP?
GDP measures or attempts to measure all activity by companies, governments, and individuals within a country.
New GDP figures in the UK are released every month. But the quarterly figures, which include three months of data, are the most watched.
Each quarter’s GDP will be slightly higher in a growing economy than the previous quarter. This indicates that people are working harder and becoming (on average) more wealthy.
Political leaders, economists, and business people want to see steady growth in GDP. This is because increasing GDP often means more people spend, more tax is paid, and better wages for workers.
If GDP falls, that means the economy shrinks – bad news both for businesses and workers. Two-quarters of declining GDP in a row is considered a recession. This can result in job loss and pay freezes.
How does a recession affect you?
The Covid Pandemic caused the worst recession in over 300 years, affecting employment and businesses and forcing the government to borrow hundreds and billions of dollars to support the economy.
The effects are still being felt. The economy’s main sectors – manufacturing, services, and production – saw their growth again in April. However, it last occurred in January 2021.
August saw the Bank of England warn that the UK could fall into recession. The economy is expected to shrink in the final three months of the year and then continue shrinking until 2023.
What is the impact of GDP on me?
If GDP grows, the government will use it as evidence to show that it’s doing a good job managing the economy. Conversely, opposition politicians will accuse the government of running it poorly if the GDP falls.
However, it is not a simple report on government performance. Because GDP is increasing steadily, people will be paying more taxes because they are spending more. This means the government has more money to spend on public services such as schools and police.
Also, governments like to be aware of how much they borrow in relation to the economy.
The first year of the Covid pandemic saw borrowing equivalent to 14% of GDP, which is the highest amount since World War Two.
Read also: Deflation – definition, causes, and effects
How does it measure?
Three ways to measure GDP include:
- Output is the total value of goods and services produced across all economic sectors – government, agriculture, manufacturing, and energy.
- Expenditure The amount of goods and services that are purchased by individuals and governments, investment in machinery or buildings, and the value of these items – it also includes imports.
- Income is the value of income, usually in terms of profit and wages.
The Office for National Statistics (ONS), UK, publishes one measure of GDP. This is calculated by all three measurements. However, early estimates mostly use the output measurement, which was based on data collected from thousands.
Why is the GDP figure often changed later?
The UK is one of the most accurate estimates of GDP among the major economies. It takes only 40 days to estimate the quarter.
At that point, 60% of the data is not yet available. This figure will change as more information is received.
What are its limitations?
GDP growth does not tell the entire story.
The statistics may not be able to account for many things.
- Hidden economy
- Unpaid work: Unpaid work, such as care for elderly relatives, isn’t included in official statistics.
- Inequality: GDP Growth doesn’t show how income is distributed across a population. So, a rising GDP could mean that the wealthiest get richer, and not everyone gets better off.
GDP is not an indicator that individual living standards are improving.
An increase in the country’s population means that GDP will rise. This is because more people will spend more money. However, individuals in the country might not be becoming richer. On the contrary, they might be getting less wealthy, despite an increase in GDP.
The ONS publishes the GDP per capita (of the population) figure, which can often tell a completely different story from the main GDP number.
How is the cost of living going up?
Critics claim that GDP doesn’t consider the sustainability of economic growth and the potential damage to the natural environment. Alternatives have been suggested.