What is GDP and why does it matter?
Gross domestic product (GDP) is a key government statistic calculated every quarter to measure the UK’s total economic activity.
It is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government.
Put simply, if GDP is positive in the last three months, the economy is growing and if it is negative, it is contracting. However, the growth is subject to the figure, for example 0.5 indicates slower economic growth than 1.
If the GDP reveals two or more consecutive quarters of contraction, the economy is officially in recession.
The figure itself can be calculated in three different ways, all of which should, in theory, produce the same number.
The first method is to calculate the value of all goods and services produced by the economy and is known as the output or production measure.
The second is the value of the income generated from company profits and wages which is known as the income measure.
Lastly, the GDP is calculated by the expenditure measure which is the value of goods and services purchased by households, government, business and from overseas.
No matter how it is calculated, the quarterly GDP figure will affect us in several ways. As the main measure of economy’s health, it is a key statistic used by the Bank of England and the Treasury to plan economic policy, adjusting tax and spending according to the state of the economy.
When GDP is down, unemployment rates increase and wages can drop.
However, there are some things GDP doesn’t include – The Black Economy of unrecorded economic activity and the non-monetary result of all of the economic activity, people’s quality of life and happiness.
