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News - 10 October 2012

What is GDP?

In our continuing series of articles which tries to explain in plain English the meaning of financial and economic phrases and statements, we focus this time on GDP.

Lavinia Newman, Founder of ABDS gives a concise definition:
“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. Two consecutive three-month periods of contraction mean an economy is in recession.”

Tonmoy Kumar, Manager of the Accounts Department of ABDS explains further:
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.

Next, we asked Stuart Coleman, Manager of the Tax Department of ABDS how GDP is 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.

Finally, we asked Peter Ham, Chief Auditor and Head of Schools and Charities at ABDS, why is GDP so important, and what is it 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, 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.

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

If you need any help and advice for your business contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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