Gross Domestic Product (GDP) is an economic concept to measure the size of the economy.
What is GDP?
GDP is a measurement used to understand the overall size of an economy over a specific period of time, this is usually one year. GDP is often used to compare the size of different economies at specific periods of time.
How is it measured?
There are currently 3 ways that GDP can be measured, each analyse different data points and provide different results. Mind you, neither of the three really paint 100% of the picture, but it’s close enough.
The Office for National Statistics measure GDP each quarter by collecting data from thousands of companies within the UK to analyse the total value of goods and services produced.
There never is enough data available to truly understand the full picture, but the other two methods help us get as close as possible to that. They include 1.) Gathering data on everyone’s income or 2.) Collecting data on the total everyone in the country has spent.
Collecting data on all expenditure is the most familiar concept, which totals up data from every possible product or service you could think of from what you spent at the barbershop to your weekly groceries, it all adds up.
The formula for GDP is broken down like this:
Household spending contributes the most to GDP each year forming almost two thirds of all spending within the UK. Investment refers to the amount spent by businesses who spend on any company related expense. For example new equipment, new buildings and new cars.
When GDP increases it is generally considered that the economy is also increasing as people are spending more, they have more to spend and that businesses are expanding. This is why GDP is so closely tied to economic growth. As it is a key indicator of the overall performance of the economy each year.
What GDP doesn’t count
As mentioned before, GDP as a measurement is far from perfect and growth in GDP doesn’t necessarily tell us how well the economy is really doing.
The first disadvantage is that we can only measure exchanges that have a monetary value. For example the number of homeless shelters available as there is no transaction to measure. Also not all transactions are positive for the economy. For example in times of war a lot of money is spent so there would be a sharp increase in GDP, but at a cost to society.
Secondly we are not told how well divided this income is split between the population. Financial mobility is a key indicator to an economy's strength, but through GDP alone we will not be able to tell the difference between the rich getting richer or everyone is growing together.
Finally, another factor ignored is the size of the population. If GDP rose that year by 3%, but the population rose even more by 8%, then on paper it would seem as though the economy is making progress, when in reality the average income per person is decreasing.
What alternatives are there to GDP?
Progress in society, the economy and the environment can also be measured through different methods that help to provide a wider view of the progress a specific nation is making. They mostly do this by trying to understand different factors that contribute to the happiness of the population.
The office of national statistics for example collects data on broader measures of personal and societal well-being. Which include health care, the level of education, workforce skill sets, leisure available, household finances and the environment.
The Happy Planet Index (produced by the the New Economic Foundation), specifically look into how well nations are able to provide long, happy and sustainable lives for their citizens.