What is GDP?

Q&A: What is GDP?

From the BBC website

GDP, or Gross Domestic Product, is arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number.

Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting.

And two consecutive three-month periods of contraction mean an economy is in recession.

What is GDP?
GDP can be measured in three ways:

• 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

• Expenditure measure: This is the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports

• Income measure: The value of the income generated mostly in terms of profits and wages.

In theory all three approaches should produce the same number.

In the UK the Office for National Statistics (ONS) publishes one single measure of GDP which, apart from the first estimate, is calculated using all three ways of measuring.

Usually the main interest in the UK figures is in the quarterly change in GDP in real terms, that is after taking into account changes in prices (inflation).

How is GDP calculated?

Calculating a GDP estimate for all three measures is a huge undertaking every three months.
The output measure alone - which is considered the most accurate in the short term - involves surveying tens of thousands of UK firms.

The main sources used for this are ONS surveys of manufacturing and service industries.
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 agriculture, energy, health and education.

New GDP figures are released every three months, but they get revised in the interim. Why?

The UK produces the earliest estimate of GDP of the major economies, around 25 days after the quarter in question.

This provides policymakers with an early, or "flash", estimate of the real growth in economic activity. It is quick, but only based on the output measure.

At that stage only about 40% of the data is available, so this figure is revised as more information comes in.

They are two subsequent revisions at monthly intervals. But this isn't the end.

Revisions can be made as much as 18 months to two years after the first "flash" estimate. The ONS publishes more information on how this is done on its website.

What is GDP used for?

GDP is the principal means of determining the health of the UK economy and is used by the Bank of England and its Monetary Policy Committee (MPC) as one of the key indicators in setting interest rates.

So, for example, if prices are rising too fast, the Bank would be expected to increase interest rates to try to control them. But it may hold off if GDP growth is sluggish, as higher rates could damage the recovery. That is the situation at the moment.

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 European Union also uses GDP estimates as a basis for determining different countries' contributions to the EU budget.

Also read:
About Economic Growth and Well Being
http://giffenman-miscellania.blogspot.com/2010/01/economic-growth-and-well-being.html

About Economic Growth
http://giffenman-miscellania.blogspot.com/2008/03/economic-growth.html

 

Capitalism’s ideological crisis

 11 Jul, 2011, 04.59AM IST, Joseph E Stiglitz in The Economic Times

Just a few years ago, a powerful ideology - the belief in free and unfettered markets - brought the world to the brink of ruin.


Even in its hey-day, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.


Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.


I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy - or at least the economies of Europe and America, where these ideas continue to flourish.


In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than carefully balancing the benefits of each government expenditure programme with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer - not allowing the national debt to increase forcesexpenditures to be limited to taxes.


This leaves open the question of which expenditures get priority - and if expenditures to pay interest on the national debt do not, a default is inevitable. Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.


A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt. Unaffordable tax cuts and wars, a major recession, and soaring healthcare costs - fuelled in part by the commitment of George W Bush's administration to giving drug companies free rein in setting prices, even with government money at stake - quickly transformed a huge surplus into record peacetime deficits.


The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract. Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.


But matters are little better in Europe. As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatisation, which will merely leave the countries that embrace them poorer and more vulnerable. This medicine failed in East Asia, Latin America and elsewhere, and it will fail in Europe this time around, too. Indeed, it has already failed in Ireland , Latvia , and Greece.


There is an alternative: an economic-growth strategy supported by the EU and the IMF. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.


Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.


Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn't, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous - even if the major emerging market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.


(The author is University Professor at Columbia University and a Nobel laureate in economics)