What is GDP and how is it measured?

19 minutes

A basic guide to how the health of the economy is measured, and why that calculation matters.

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Gross domestic product (GDP) is an important tool for judging how well, or badly, an economy is doing.

It lets the government work out how much it can afford to tax and spend, and helps businesses decide whether to expand and hire more people.

The latest figures show UK economy fell into recession at the end of 2023, after GDP fell in two successive three-month periods.

GDP is a measure of all the economic activity of companies, governments and individuals in a country.

In the UK, new GDP figures are published by the Office of National Statistics (ONS) every month, but the quarterly figures - covering three months at a time - are considered more important.

When an economy is growing, each quarterly GDP figure is slightly bigger than in the previous three-month period.

Most economists, politicians and businesses like to see GDP steadily rising 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 .

According to the first official estimate, the UK economy picked up in January. It grew by 0.2%, boosted by stronger sales in shops and online and more construction activity.

This followed a 0.1% fall in December, and the news that the economy went into recession at the end of 2023.

Higher prices squeezed consumers' budgets throughout 2023, and across the year as a whole, the economy grew 0.1%.

Growing the economy was one of five pledges Prime Minister Rishi Sunak made in January 2023.

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.

But it's more than just a report card on the government's economic performance.

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 that 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.

Government borrowing was equivalent to about 14% of the UK's total GDP in the first year of the pandemic, the highest proportion since World War Two.

GDP can be measured in three ways:

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.

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 .

GDP doesn't tell the whole story :

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.

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.

In 2019, then New Zealand PM Jacinda Ardern released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth.

But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.

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