GDP: a brief guide

The first estimate of GDP growth for the second quarter of 2014 will be released tomorrow morning and will generate plenty of news coverage, analysis and comment. To provide a little context, we explain what GDP is and how it is measured.

What is GDP?

Gross Domestic Product is the total value of goods produced and services provided in a given time period. For example, GDP in the UK was £1,613 billion in 2013. GDP does not include something that is currently being used but was made in a previous time period. So that sofa you bought in 2005 and still use today does not count toward 2014 GDP.

GDP is one of the most important economic statistics as it provides a gauge of total economic activity. In general, periods of real-terms GDP growth are often associated with rising standards of living and higher tax revenues for government.

How is GDP calculated?

GDP is calculated by the Office for National Statistics (ONS) on a quarterly basis. This is a huge task, which entails using a vast array of sources. These include many surveys of thousands of companies, households and government departments, as well as data from administrative records, among other things.

GDP can be measured in three ways, which in theory will give the same GDP figure. These are:

  • Production measure – value of all goods and services produced by all sectors of the economy: construction, manufacturing, retail, services etc. Also known as the output measure.
  • Expenditure measure – adding up: (i) all the goods and services bought by households and government, (ii) investment and (iii) exports minus imports.
  • Income measure – the total value of income generated by the production of goods and services in terms of company profits and employee benefits (mostly wages).

GDP growth

GDP growth is the difference in GDP between two time periods. Politicians and commentators will often quote GDP growth as the change in GDP between the most recent quarter and the previous quarter, e.g. Q1 2014 and Q2 2014.

This is usually shown in real terms, i.e. adjusted for price changes, and called quarter-on-quarter growth. It provides an indication of short-term movements in economic activity. In Q1 2014 it was +0.8% – the difference between GDP of £387.3 billion in Q4 2013 and £390.4 billion in Q1 2014.

Year-on-year growth figures are also used. These show the change in the most recent quarter compared with the same quarter one year before. For example, Q1 2014 compared to Q1 2013, which was +3.0%. This gives a better idea of broader trends in economic activity.

When is GDP data published?

The first or ‘preliminary’ estimate of GDP is published by the ONS 3-4 weeks after the end of the previous quarter (faster than in any other major economy). For example, the preliminary estimate for Q2 2014 will be published on 25 July. This preliminary GDP growth figure is based on only 44% of the data that will eventually be provided to produce the final growth number, with the rest estimated by the ONS.

This illustrates the trade-off between timeliness (we all want data as soon as possible) and comprehensiveness. The ONS could wait for more data to be collected before publishing its first GDP estimate, but at some point the disadvantage for policymakers of not having recent GDP estimates will be greater than the advantage of having slightly more accurate data.

Unsurprisingly then, GDP is often revised in two subsequent releases – the Second Estimate of GDP and the Quarterly National Accounts – each published one month after the previous release. These releases have progressively more detail of economic output in them, as well as revisions to the headline GDP figures (as more information becomes available). The cycle then begins anew for the next quarter.

Finally, once a year the ONS publishes the Blue Book, the country’s annual set of national accounts. This reconciles past data and provides the most-detailed look at the country’s economy. The next release is scheduled for 31 October.

Changes to how GDP is measured

The ONS is making some changes to the way it calculates GDP. These modifications and the impact they will have on GDP and growth are explained in the recent blog post “Sex, drugs and non-profit institutions serving households: how ONS are revising GDP figures”.

Further information

Author: Daniel Harari