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Gross domestic product (GDP) is an important tool for determining whether an economy is doing well or poorly.
This allows governments to calculate how much they can tax and spend, and helps companies decide whether to expand and hire more people.
The latest figures confirm the UK economy will fall into recession at the end of 2023 after gross domestic product (GDP) fell for three months in a row for the second consecutive quarter.
What is GDP and how is it calculated?
GDP is a measure of all economic activity of a country's businesses, government, and individuals.
In the UK, new GDP statistics are published every month by the Office for National Statistics (ONS), but the quarterly figures, which cover three months at a time, are considered more important.
If the economy is growing, each quarter's GDP number will be slightly larger than the previous three months.
Most economists, politicians, and businesses want GDP to rise steadily. That's because it usually means people spend more, additional jobs are created, more taxes are paid, and workers get raises.
A falling GDP means the economy is shrinking, which can be bad news for businesses and workers.
What is the current GDP of the UK?
The UK economy recovered in January, according to the first official estimates. Sales rose 0.2%, driven by higher in-store and online sales and increased construction activity.
This followed news that the economy would fall into recession at the end of 2023 after falling 0.1% in December.
Economic growth was one of Chancellor Rishi Sunak's five pledges in January 2023.
How does GDP affect me?
Governments can use GDP growth as evidence of successful economic management. Similarly, when GDP declines, opposition politicians claim that the government is badly run.
But this is more than just a report on the government's economic performance.
If GDP is steadily rising, people will earn more and spend more, so they will pay more taxes. This means the government has more money to spend on public services such as schools, police and hospitals.
These situations can reverse if the economy contracts and the country goes into recession.
Governments tend to receive less money in taxes, so they may decide to freeze or cut public spending. Or taxes may go up.
In 2020, the coronavirus pandemic caused the UK to experience its deepest recession in more than 300 years, forcing the government to borrow hundreds of billions of pounds to support the economy.
Government borrowing in the first year of the pandemic was equivalent to around 14% of the UK's total GDP, the highest proportion since the Second World War.
How is GDP measured?
GDP can be measured in three ways.
- output: the total value of goods and services produced by all sectors of the economy (agriculture, manufacturing, energy, construction, service sector, government)
- Spending: The value of goods and services purchased by households and governments, investments in machinery and buildings – this includes the value of exports less imports.
- income: the value of the income generated, primarily in terms of profits and wages
In the UK, the ONS publishes a single GDP measure calculated using all three measures.
But early estimates mainly measure output and use data collected from thousands of companies.
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Why do GDP numbers change so often?
The UK is the first major country to release gross domestic product (GDP) estimates about 40 days into the quarter.
At this stage, only about 60% of the data is available, so this figure will be revised as more information comes in.
What are the limitations of GDP numbers?
- Hidden economy: Unpaid work such as caring for children or elderly relatives is not captured.
- inequality: Also, GDP growth does not show how income is distributed across the population – GDP growth does not mean that everyone is better off, but that the richest people are getting richer. may be the result
Just because GDP is increasing does not mean that the standard of living of individuals is improving.
When a country's population increases, more money is spent, thus pushing up the GDP.
But individuals in that country may not be getting richer. Even though GDP is rising, people may be poorer on average.
The ONS also publishes figures for GDP per capita, or GDP per head of population, which may tell a different story.
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Official GDP statistics do not take into account unpaid work such as childcare.
Alternative measures have been developed to try to capture this.
Since 2010, the ONS has also measured happiness alongside economic growth. It assesses people's personal finances and circumstances, as well as their health, relationships, education, and skills.
In 2019, then-New Zealand Prime Minister Jacinda Ardern announced the country's first-ever welfare budget, which prioritized health and life satisfaction over economic growth.
However, despite its limitations, GDP remains the most widely used measure in most government decisions and international comparisons.
