What does GDP stand for and how is it measured?

GDP might be one of those financial terms you often hear about but don’t really understand – and that’s nothing to feel bad about.

But even if you’re not clued up on the lingo of the finance industry, most people will be alarmed at the news that the UK economy plunged 20% during the first quarter of coronavirus lockdown.

Office for National Statistics (ONS) statistician Jonathan Athow said April’s fall is ‘the biggest the UK has ever seen’ and ‘almost 10 times larger than the steepest pre-Covid-19 fall’ echoing predictions by Chancellor Rishi Sunak who feared the country would see a recession ‘the likes of which we have never seen.’

To explain what this means, and how valid concerns that the UK could be entering the deepest recession in centuries are, here’s what you need to know about what the GDP is, how it’s calculated and if it’s 100% accurate.  

What is GDP?

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GDP stands for Gross domestic product (GDP) and it is the sum (measured in pounds) of the value of goods and services produced in the economy.

The Bank of England expanded on this to state that the GDP is ‘a measure of the size and health of a country’s economy over a period of time (usually one quarter or one year). It is also used to compare the size of different economies at a different point in time.’

When it comes to using the GDP, the measurement which is often the most important focus is percentage change; this measures the growth or shrinkage of the economy over a set duration of time, typically in yearly quarters (three months).

This has been used as a measurement of the country’s economic health since the 1940s.

If the GDP measure is up on the previous quarter, it can be inferred that the economy is growing, and if it is negative, the economy is shrinking.

Further to that, the GDP is widely used to officially dictate whether a country is in a recession.

The commonly accepted definition of a recession in the UK is when the GDP shrinks for two quarters at least.

How is GDP measured?

There are three ways the GDP can be measured.

These are:

• Output measure – the total value of goods and services produced
• Expenditure measure – what everyone in the country has spent
• Income measure – the value of the income generated by people’s wages and income

In the UK, the Office for National Statistics (ONS) produces one GDP measure combining all three figures.

Is the GDP accurate?

The GDP has limitations because of two main factors – how early the UK estimates the GDP and what cannot be factored into the equations.

The UK produces one of the earliest estimates of GDP out of the major economies – about 40 days after the most recent quarter being measured.

This is useful for the government to predict economic activity and react accordingly, but it is mainly based on the output measure, so doesn’t paint a full picture.

This is why the GDP can be – and often is – revised at a later date.

The other limitation of the GDP is that not everything can be counted.

Caring for an elderly relative is one example where a service is provided, but it isn’t necessarily paid for.

The GDP also doesn’t tell us anything about how evenly income is split across the population.

Growth could mean the country is richer, with money pouring in to all facets of society, but it could also just be an indication that one industry or percentile of people are generating higher incomes.

To put simply, if the one per cent are getting richer, that doesn’t mean the GDP of a country is actually improving.

Finally, the size of the population should be factored in but isn’t. If the population has grown, then the GDP growth wouldn’t be as substantial.

MORE: What is a recession and what happens when a country enters one?

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