What is GDP, how is it measured and why does it matter? (2024)

Gross domestic product (GDP) is an important tool for measuring how a country's economy is doing.

It lets governments work out how much they can afford to tax and spend, and helps businesses decide whether to hire more people.

GDP is a measure of all the economic activity of companies, governments and people in a country.

In the UK, new GDP figures are published by the Office of National Statistics (ONS) every month. However, quarterly figures - covering three months at a time - are considered more important.

Most economists, politicians and businesses like to see GDP rising steadily.

That's because it usually means people are spending more, extra jobs are created, more tax is paid and workers get better pay rises.

When GDP is falling, it means the economy is shrinking - which can be bad news for businesses and workers.

If GDP falls for two quarters in a row, that is known as a recession, which can lead to pay freezes and job losses.

According to the ONS, the economy grew by 0.4% in May, rebounding from zero growth in April when wet weather affected consumer spending.

During the first three months of 2024, the economy grew by 0.7%, thanks to strong spending on services such as such as retail, hospitality and public transport. The figure was revised up from the first estimate of 0.6%.

This growth meant that the UK exited the recession it entered at the end of 2023, when the economy shrank in the last two quarters of the year.

If GDP is going up steadily, people pay more in tax because they're earning and spending more.

This means more money for the government, which it can choose to spend on public services, such as schools, police and hospitals.

When the economy shrinks and a country goes into recession, these things can go into reverse.

Governments tend to get less money in tax, which means they may decide to freeze or cut public spending. Or taxes may rise.

In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.

In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.

But early estimates mainly use the output measure, using data collected from thousands of companies.

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

The ONS publishes more information about this on its website, external.

GDP doesn't tell the whole story:

Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.

If a country's population increases, it pushes GDP up, because with more people, more money will be spent.

But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.

The ONS also publishes a figure for GDP per capita - or head of population - which can tell a different story.

In fact, when you strip out inflation and population growth, the latest quarterly figures show that in the first three months of 2024, GDP per capita was 0.7% lower than for the same period in 2023.

Some critics also argue that GDP doesn't take into account whether the economic growth it measures is sustainable, or the environmental damage it might do.

Alternative measures have been developed which try to capture this.

Since 2010, the ONS has also measured well-being, external alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.

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