2.1.1 - Economic growth and GDP

Measuring domestic output

A country produces services as well as physical goods, so counting tonnes or individual products cannot measure its whole output.

Gross domestic product (GDP) measures the value of final goods and services produced within an economy over a period, usually a year or quarter. “Domestic” refers to the location of production: output from a foreign-owned factory inside the country counts. A used bicycle sold again is not new production, although the dealer's newly provided service can count. “Final” prevents counting the same production twice. If flour worth £1 becomes part of a loaf sold for £3, counting both full sales values would exaggerate output; GDP counts the final loaf, or equivalently the value added at each stage.

Economic growth means an increase in an economy's real output over time. GDP is a flow during a period, rather than the stock of buildings, machines or savings at one date. Compare the same length of period and the same measurement basis. A quarterly figure cannot be directly compared with an annual total to calculate annual growth.

Governments seek sustained growth because more output makes more goods and services available and can support employment and incomes. Measuring it is the first step; explaining who benefits requires further evidence.

Real growth and percentage change

Higher spending on the same quantity of output can raise GDP measured in money even when production has not grown.

Nominal GDP values production at the prices prevailing in that period. Real GDP adjusts for price changes, allowing the volume of production to be compared. Imagine a bakery producing 1,000 identical loaves in each of two years. If the price rises from £2 to £2.20, nominal output rises from £2,000 to £2,200, but its real output has not risen. If it instead produces 1,100 loaves at the original £2 price, real output rises by 10%.

Use real GDP to calculate economic growth. The original GDP is the base, because the question asks how large the change is compared with where the economy started.

With illustrative real GDP rising from £240 billion to £246 billion, the increase is £6 billion and growth is $6\div240\times100=2.5\%$. Using 246 as the denominator would answer a different question. A fall gives a negative growth rate: 240 to 228 is $-12\div240\times100=-5\%$. Slower positive growth still means rising real output.

For a business, real growth can indicate an expanding market, but it does not guarantee rising sales in every industry. Demand may move between products, and the business must also consider its own customers.

Output per person and data

An economy's total output can grow while the average amount available per person stays unchanged.

GDP per head, also called GDP per capita, divides GDP by population. For comparisons over time, use real GDP per head. It is an arithmetic average of output per person, not the wage received by each resident.