What is GDP?

Perhaps the most talked about economic concept. But what is it and how do we measure it?

Gross domestic product or GDP is perhaps the most talked about economic concept. It measures the size of a country’s economy. This guide explains how GDP is measured, as well as which things GDP doesn’t capture.

What is GDP?

Gross domestic product or GDP is a measure of the size and health of a country’s economy over a period of time (usually one quarter or one year). It is also used to compare the size of different economies at a different point in time.

How is GDP calculated?

To measure GDP each quarter, the Office for National StatisticsOpens in a new window (ONS) collects data from thousands of UK companies. And to complicate matters, there are three ways to measure GDP! You can calculate it by adding up, for everyone in the country:

  • The total value of goods and services (‘output’) produced;
  • Everyone’s income;
  • Or what everyone in the country has spent.

As this ONS guideOpens in a new window explains, these are three ways to estimate the same thing. You get different figures depending on which method you use because there’s never enough data to build a picture of the economy that’s 100% complete.

The last measure, total spending, is perhaps the most familiar and can be broken down as:

What is GDP - 1


Household spending forms the biggest part, accounting for about two thirds of GDP. Meanwhile, a business buying new equipment or a construction company building houses are examples of investment.

So when you hear talk of a country’s ‘output’, ‘expenditure’ or ‘income’, these are all ways to measure GDP.

When GDP goes up, the economy is growing – people are spending more and businesses may be expanding.
For this reason, GDP growth – also called economic growth or simply “growth” – is a key measure of the overall strength of the economy.

(Bank of England)
This page was last updated on 10 January 2019


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Categories: Finance