Articles

A Guide to the GDP

20.05.2013

The GDP, ‘Gross Domestic Product’, is arguably the most important of all national economic statistics. The GDP seeks, every three months, to capture the state of the economy in one percentage number.

If the GDP figure is up on the previous three months, the economy is growing. If it is down, the economy is contracting and if the contraction is over two consecutive months, the economy is in recession! In the UK, the Office of National Statistics (ONS) gathers and publishes the GDP data.

GDP is the principal means of determining the health of the UK economy and is used by the Bank of England as one of the key indicators in setting interest rates. If GDP growth is slow, higher interest rates could damage any recovery. However if prices are rising too fast, we could expect the Bank to increase interest rates to try to control them.

The Treasury also uses GDP when planning economic policy. When an economy is contracting, tax receipts tend to fall and the government adjusts its tax and spending plans accordingly. UK GDP is used internationally by the various financial bodies such as OECD, IMF, and the World Bank to compare the performance of different economies. The EU also uses GDP estimates as a basis for determining different countries’ contributions to the EU budget.

The Office for National Statistics publishes one single GDP quarterly figure, using three ways of measuring growth. Each measure should produce the same GDP percentage number.

Output measure: This is the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government. Considered the most accurate in the short term, this involves surveying tens of thousands of UK firms.

Expenditure measure: This is the value of the goods and services purchased by households and by government, investment in machinery and buildings, and including the value of exports minus imports. For this measure, the ONS surveys manufacturing and service industries.

Income measure: The value of the income generated mostly in terms of profits and wages. Information on sales is collected from 6,000 companies in manufacturing, 25,000 service sector firms, 5,000 retailers and 10,000 companies in the construction sector.

Data is also collected from government departments covering activities such as energy, agriculture, health and education. The ONS produces the earliest estimate of GDP of the major economies around 25 days after the end of a three month period, providing an early estimate of the real growth in economic activity. It is quick, but only based on the output measure, when around only 40% of the data is available, so this figure is revised as more information comes in over the next two months.

We may be forgiven for wondering about the statistical reliability of this flagship growth marker when we consider that the percentage growth, after all the number crunching, is often only 1% or less.

In addition, the quarterly published GDP growth figure can still be subject to later revision to take account of subsequent analyses, for example of price and inflation figures. However the final quarterly GDP figure is what everyone seems to anticipate and wait for.

Are we coming out of a double-dip recession or heading for a triple-dip, is it a ‘blip’ or are ‘green shoots emerging’ – whatever the three monthly GDP growth figure is, we can be sure that there will be a lot of talk about it!

Sources: www.ons.gov.uk

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