Gross Domestic Product, more commonly known as GDP, remains the world’s most closely-watched economic indicator. Its growth – or lack of it – is used to measure economic progress. A positive GDP reading suggests an economy is growing, a negative one that it’s slowing down. But there is much more to GDP that just one number. In this post Craig McLaren is our guide to how GDP is calculated and how it’s best understood.
Three Measures of GDP
In very simple terms, GDP measures how much is produced, how much is spent and how much is earned in the economy over a given period and, also, how this changes over time. But the way we measure it is complex.
There are three district ways of measuring GDP – output (the goods and services produced in the economy), expenditure (money invested by businesses and spending by households and government) and income (business profits, household income and government tax take). These should theoretically add up to exactly the same number. However, we use a huge number of data sources to measure the economy and the data we receive to do so builds up over time as it all becomes available. This means there are small discrepancies between the three measures but we are always transparent where these discrepancies exist.
Monthly GDP
The most often cited of these is output. That is because, in the short term, it is the measure of GDP that we have the best information about, thanks to our large monthly survey of UK businesses, and so is the basis for our initial estimates of GDP. This is our most timely estimate of GDP and comes out around 40 days after the reference period. The UK is one of only a small number of countries that produce monthly estimates of GDP.
On a theoretical level, the output measure looks at the turnover of all businesses, takes away all their costs, and then removes the effects of rising prices to give a ‘real’ estimate of GDP. However, in the short term, we don’t have information about how costs facing businesses are changing, so our monthly estimate of GDP is simply business turnover, adjusted to take account of price change.
Quarterly GDP
When we produce our first quarterly estimate of GDP, as well as having these initial output estimates, we also publish our first estimates of expenditure and income. However, because the initial estimates of output are of a higher quality, we align (or balance) our estimates of expenditure and income to the output growth rate.
We only balance to output in the most recent two quarters, though. For recent quarters older than the most recent two, we create a simple average of what our output, expenditure and income estimates are showing to create the headline quarterly GDP figure.
Balanced quarterly and annual GDP
For quarters further back, (currently 2020 and earlier), we are able to create fully balanced estimates of the economy, where we have full tax data and detailed information about changes in businesses costs, and the amount of each good and service consumed within the economy allowing us to create our best estimates possible of all the interactions.
Our annually balanced GDP data forms part of our Blue Book publication, which is where we confront our annual datasets at a detailed industry and product basis; and across the three different measures of GDP. This allows us to bring in comprehensive and updated data for our historical time periods. For example, in this year’s Blue Book, we reviewed the 2020 annual data for the first time in detail. The latest monthly and quarterly estimates for GDP are then revised, using the latest balanced period as a starting point.
Revisions
At each stage of this process, though, whether receiving later monthly turnover data, when averaging together the three measures or when fully balancing everything together, there is the possibility of our data being revised. However, our previously published research shows that over the time, while we do revise our estimates, these revisions tend to be small – an average revision of around 0.01pp on quarterly growth – and unbiased.
Conclusion
Bringing together the vast amounts of data needed to produce GDP is anything but straightforward, but this data confrontation process is crucial to being able to produce high-quality estimates of our changing economy as quickly as possible.
Craig McLaren, Head of National Accounts at the ONS
FAQs
Measuring GDP. GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within the borders of a country.
What is GDP and how do you measure it? ›
The Output Method measures GDP as the value of. Output (what is produced) minus the value of goods and services used up in producing these outputs (the inputs or Intermediate Consumption) plus all Taxes on Products like VAT. minus all Subsidies on Products like renewable energy subsidies.
What is GDP in simple terms? ›
Gross domestic product (GDP) is the most common measure for the size of an economy, and it measures the value of total final output of goods and services produced by that economy in a certain period of time.
How is US GDP measured? ›
GDP is the way we measure the U.S. economy and its growth.
GDP = the total market value of the goods and services produced within the United States in a year. A good is a video game, a car, an apple, a gold ring.
Why is GDP a bad measure of economic growth? ›
From the perspective of a citizen living with the day-to-day realities of life, GDP can be misleading. It doesn't take into account externalities such as crime, pollution, inequality, depletion of natural resources, and other negative (and costly) social and environmental aspects of existence.
How do you calculate the GDP? ›
Accordingly, GDP is defined by the following formula: GDP = Consumption + Investment + Government Spending + Net Exports or more succinctly as GDP = C + I + G + NX where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures ...
How do you measure GDP by income? ›
income approach to GDP
an approach to calculating GDP that involves adding up all of the income earned within the borders of a country in a given year; the income approach adds up wages, rents, interest, and profits.
How do you explain GDP to a child? ›
Gross domestic product, or GDP, is a measure used to evaluate the health of a country's economy. It is the total value of the goods and services produced in a country during a specific period of time, usually a year.
How is GDP calculated for dummies? ›
GDP can be calculated by adding up all of the money spent by consumers, businesses, and the government in a given period. It may also be calculated by adding up all of the money received by all the participants in the economy. In either case, the number is an estimate of "nominal GDP."
What country has the highest GDP? ›
With a GDP of more than 20 trillion dollars, the United States of America is the world's largest economy.
GDP in a country is usually calculated by the national statistical agency, which compiles the information from a large number of sources. In making the calculations, however, most countries follow established international standards.
What is an example of GDP? ›
We know that in an economy, GDP is the monetary value of all final goods and services produced. For example, let's say Country B only produces bananas and backrubs. Figure %: Goods and Services Produced in Country B. In year 1 they produce 5 bananas that are worth $1 each and 5 backrubs that are worth $6 each.
Who tracks GDP? ›
Gross Domestic Product. U.S. Bureau of Economic Analysis (BEA)
Why is the US GDP so high? ›
The American economy is fueled by high productivity, well developed transportation infrastructure, and extensive natural resources. Americans have the sixth highest average household and employee income among OECD member states.
What is a good GDP for a country? ›
For a developed economy, an annual GDP growth rate of 2%-3% is considered normal. Therefore, any GDP growth above the said rate is a strong sign that an economy is expanding and prospering. A prospering economy creates more wealth, which leads to increased spending.
Which will increase GDP the most? ›
Of all the components that make up a country's GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy.
What is GDP a measure of quizlet? ›
GDP measures the value of total production, total income, and total expenditure. The value of the final goods and services produced in a given year expressed in terms of the prices of that same year.
How is the economy measured? ›
Gross Domestic Product (GDP), a widely used indicator, refers to the total gross value added by all resident producers in the economy. Growth in the economy is measured by the change in GDP at constant price.
How to increase GDP? ›
Multiple factors working together typically are what impact economic growth, which often is reflected in GDP growth and GNP growth. There are numerous strategies governments might use to try and stimulate economic growth, such as tax breaks or tax rebates, deregulation, and investment in infrastructure.
