What is GDP and how is it measured?

GDP - or Gross Domestic Product - is an important tool for judging how well, or badly, an economy is doing.

It helps businesses decide when to expand and hire more people, and lets the government work out how much it can afford to tax and spend.

GDP is a measure of all the activity of companies, governments and individuals in a country.

In the UK, new GDP figures are produced every month, but the quarterly figures - covering three months at a time - are considered more significant.

When an economy is growing, each quarterly GDP figure is slightly bigger in than the previous three-month period.

Most economists, politicians and businesses like to see a steadily rising GDP because it usually means people are spending more, extra jobs are created, more tax is paid and workers get better pay rises.

When GDP is falling, it means the economy is shrinking - which is bad news for businesses and workers.

The Covid pandemic caused the most severe recession seen in more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.

According to the official statistics for the most recent quarter, the economy grew by 0.2% between April and June. That was slightly higher than predicted.

The Office of National Statistics (ONS) said the fall was driven by strike action by NHS workers and teachers, plus wet weather which hit construction and retailers.

In January 2023, the Prime Minister Rishi Sunak set out a pledge to "grow the economy". This will be met if GDP is bigger in the three-month period between October and December 2023 than it was during the previous quarter (July-September).

The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.

But it's more than just a report card on the government's economic performance.

If GDP is going up steadily, people pay more in tax because they're earning and spending more. This means more money for the government to spend on public services, such as schools, police and hospitals.

Governments also like to keep an eye on how much they are borrowing in relation to the size of the economy.

For example borrowing was equivalent to about 14% of GDP in the first year of the Covid pandemic, the highest proportion since World War Two.

GDP can be measured in three ways:

In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.

But early estimates mainly use the output measure, using data collected from thousands of companies.

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

The ONS publishes more information about this on its website.

Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.

If a country's population increases, it pushes GDP up, because with more people, more money will be spent.

But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.

The ONS also publishes a figure for GDP per capita - or head of population - which can tell a different story.

Alternative measures have been developed which try to capture this.

In 2010, the ONS started measuring well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

In 2019, then New Zealand PM Jacinda Ardern released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth.

But despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.