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9 August 2019
The UK's GDP fell by 0.2% between April and June this year, its worst
performance since 2012, according to the Office for National Statistics (ONS).
But what exactly is GDP, and how is it measured in the UK?
What is GDP?
Gross domestic product (GDP) is the sum (measured in pounds) of the value of
goods and services produced in the economy.
But the measurement most people focus on is the percentage change - the growth
of the country's economy over a period of time, typically a quarter (three
months) or a year. It's been used since the 1940s.
The most important percentage change is given in real terms - it strips out the
effect of rising prices or inflation.
If the GDP measure is up on the previous three months, the economy is growing.
That generally means more wealth and more new jobs.
If it is negative, the economy is shrinking. And two consecutive three-month
periods of shrinking meets the most widely accepted definition of a recession.
How is it measured?
GDP can be measured in three ways:
Output measure: This is the total value of the goods and services produced by
all sectors of the economy: agriculture, manufacturing, energy, construction,
the service sector and government
Expenditure measure: The value of the goods and services bought by households
and by government, investment in machinery and buildings. This also includes
the value of exports minus imports
Income measure: The value of the income generated mostly in terms of profits
and wages.
In the UK, the ONS publishes one single measure of GDP, which is calculated
using all three ways of measuring. But early estimates - such as Friday's
figures - mainly use the output measure.
It collects data from thousands of UK companies to use in its calculations.
What is it used for?
It's the main way of determining the health of the UK economy.
The Bank of England uses it as one of the key indicators in setting interest
rates.
So, for example, if prices are rising too fast, the bank could increase
interest rates to try to control them. But it might hold off if GDP growth is
slow.
Image caption The Bank of England recently cut the UK's growth forecast
The Treasury uses GDP when planning economic policy. When an economy is
shrinking, the amount the government gets from taxes tends to fall and the
government adjusts its tax and spending plans accordingly.
UK GDP is also used internationally by financial bodies such as the World Bank
and the International Monetary Fund to compare growth between different
countries.
Why is it often changed later?
The UK produces one of the earliest estimates of GDP of the major economies,
about 40 days after the quarter in question.
This provides the government with an early estimate of the real growth in
economic activity. It is quick but mainly based on the output measure.
At that stage, only about 60% of the data is available, so this figure is
revised as more information comes in.
Revisions can be made later as more information becomes available or when
definitions change. The ONS publishes more information on how this is done on
its website.
What are its limitations?
GDP growth doesn't tell the whole story.
There are lots of things the statistics might not take into account:
Hidden economy: Unpaid work isn't captured in official figures, such as caring
for an elderly relative
Inequality: GDP growth doesn't tell us how income is split across a population.
A rising GDP could result from the richest segment of society getting richer,
rather than everyone becoming better off
Plus, GDP is only one way to think about a country's development.
Just because GDP is increasing, it doesn't mean that a citizen's standard of
living is improving. For example, in times of war, GDP will often increase
because more money is being spent.
Image caption Shortly after World War Two, UK government debt peaked, at about
270% of GDP
Different countries have developed alternative measures to determine a
country's health.
In 2010, the ONS started measuring wellbeing alongside economic growth. It
looks at health, relationships, education and skills, as well as personal
finances and the environment.
New Zealand's Prime Minister, Jacinda Arden, recently released the country's
first "wellbeing budget", prioritising health and life satisfaction rather than
economic growth.