GDP – what is it and how is it measured?

3 min Read Published: 25 Apr 2013

With today's announcement of  UK GDP figures for Q1 2013 I thought it might be useful to understand a bit more about the UK GDP and how it's measured.

What is Gross Domestic Product (GDP)?

Gross Domestic Product is an indicator of a country's overall economic health as well as a gauge of the standard of living. In the UK GDP is reported ever quarter and compared with  previous quarterly figures. If the current GDP is up on the previous quarter then the economy is growing if it is down then the economy is contracting. Two consecutive quarterly downward trends indicates that the  economy is in recession.

How is GDP measured?

There are three approaches to measuring  GDP

  • Production approach - this IS known as GDP(P) and is the sum of all production activity within all sectors of the economy - agriculture, manufacturing, energy, construction, services and the government
  • Expenditure approach - this is known as GDP(E) and is the sum of goods and services purchased within an economy. It also includes the sum of exports, less imports
  • Income approach - this is know as GDP(I) and is the sum of all income generated in the economy primarily in terms of profits and wages

In the UK the Office for National Statistics (ONS) publishes one single measure of GDP every three months  combining all three methods.

How is all the data collected to calculate GDP?

This a massive task with thousands of UK companies surveyed regarding output, together with sales information supplied by thousands more companies over all sectors of the economy. Information is also collected on government income and expenditure to obtain a complete picture.

Why do we sometimes get a revised GDP figure?

The UK releases the quarterly GDP figures earlier than most economies to give an early estimate of where the economy is heading. This early estimate is made with only around 40% of the data collected, so when all the data is received there may be an adjustment to the original figure.

What is GDP used for?

It is used by the government to set economic policies and the Bank Of England when setting interest rates. It is also used by the European Union as a basis for determining different countries contributions to the EU budget.

How does the UK GDP compare with other countries?

According to the International Monetary Fund (2012) the UK is 24th in a list showing GDP per head of population (per capita). Other major european countries positions are - Denmark (8th), Sweden (9th), Austria (13th), France (23rd) and Germany (22nd).

 

 

 

Image -  freedigitalphotos .net

Looking for a financial adviser near you?

Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.