UK Economy grows faster than expected – but should you care about GDP?

3 min Read Published: 27 Oct 2010
renjith krishnan / FreeDigitalPhotos.net

The UK's Gross Domestic Product (GDP) grew by 0.8% between July and September this year.

But what is GDP?

The short answer is that Gross Domestic Product (GDP) measures a country’s economic output in a single figure. Every three month’s the UK’s GDP figure is calculated and if it is positive then the economy is growing which is good news for everyone as a booming economy means more jobs, among other things. But if GDP is negative then it means the economy is shrinking, leading to fewer jobs and falling house prices.

If you want the long answer to what GDP is then it can be found at the Office for National Statistics website.

So should I care about GDP?

Yes – GDP is used to determine the rate at which the economy is growing. If this figure is negative for two consecutive quarters then the UK is officially deemed in recession. And as everyone knows, recession is a bad thing. But conversely, as stated above, a positive GDP means a growing economy which means more jobs and hopefully greater prosperity.

No – The problem with GDP figures are that they show the state of the economy in the preceding three month period prior to publication. Consequently GDP provides a snapshot of the past and doesn’t necessarily give an indication of how the economy will grow in future. Think of it like trying to drive a car but only being allowed to look in your rear-view mirror. Scary stuff.

Also the initial GDP figures are published only 25 days after the three-month quarter in question ends. This initial GDP estimate is known as the ‘flash estimate’ and only takes into account about 40% of the data which has to be collected to formalise the GDP figure. Hence, when this further information is collated the GDP figure is often  revised up or down at a later date.

Of course, GDP is just a figure and doesn’t bear relevance to everyday life. For example, try telling someone who has just lost their job that we are no longer in recession.

What about today’s positive GDP figures – it’s good news isn’t it?

Yes it is good new but caution should be taken when reading too much into the latest GDP figure. Firstly the GDP figure could be revised in the future and secondly the positive result was in part down to a recovering construction industry as well as government spending. The former’s rate of recovery is thought to be unsustainable while the later is obviously about to be seriously slashed. So this GDP figure is not proof that a double dip recession has been avoided.

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