GDP: What is it and why does it matter?

It’s been the standard measure of economic growth for more than 70 years, but gross domestic product (GDP) is starting to look outdated, some experts say.

This is because, as a key tracker of global progress, it is unable to account for and measure human, social or natural capital.

So, what can GDP tell us about the states of our nations and why does it matter?

GDP measures the health of national and global economies, the International Monetary Fund (IMF) explains.

GDP data is based on the total end value of all goods and services produced in a country over a particular period.

Measuring GDP shows the size and growth rate of an economy.

There are three ways to calculate GDP, explains the Bank of England, the United Kingdom’s central bank. You can add up the total value of goods and services produced in a country – or you can add up everyone’s income. The third way of calculating GDP is to measure what everyone in the country has spent. This includes household spending, investment, government spending and net exports – the value of your country’s exports to other countries minus the value of imports to your country.

GDP was first proposed as a concept during the Great Depression in America in 1937, according to financial information site Investopedia. Economist Simon Kuznets proposed it in a report to the US Congress. It was later widely adopted as a standard way to measure national economies.

GDP helps policymakers, investors and businesses make decisions by understanding an economy’s health, Investopedia says.

It can be used to compare different countries and regions.

When GDP is growing, workers and businesses are generally better off than when it is not, says the IMF.

“When GDP is shrinking… employment often declines”, the IMF adds.

GDP helps governments decide “how much it can spend on public services and how much it needs to raise in taxes,” explains the BBC.

If GDP declines over two consecutive quarters, it shows the economy is in recession. This can mean “pay freezes and lost jobs”, the BBC adds.

Globally, the war in Ukraine is expected to contribute to a “significant slowdown” in growth this year, the IMF warns. Using real GDP data – which strips out the effect of inflation on goods and services – the IMF predicts global growth will slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.

Experts say GDP is an imperfect measure of an economy’s health, for various reasons.

For example, GDP doesn’t measure population growth. If GDP in the UK rose 2%, but the population grew 4%, the average income per person would actually have fallen, the Bank of England explains.

There are also things that inflate GDP, but don’t make the country more prosperous.

Government spending on war, for example, can push up GDP. Chopping down a chunk of the Amazon rainforest and selling the timber might also show up as a spike in GDP – “but at huge environmental cost”, the Bank of England adds.

A growing argument against GDP is that it doesn’t measure the wellbeing of a country and its people. Wellbeing, equality and inclusion are key measures globally of sustainable development – and against this backdrop, the World Economic Forum suggested in 2016 that GDP was “struggling to stay relevant” on its ‘Beyond GDP’ platform.

One solution proposed by the Forum is to establish a common, core set of metrics and recommended disclosures that corporations could use to align their mainstream reporting and, in so doing, work towards growth that is sustainable and inclusive. This work has resulted in a coalition of CEOs who support progress on convergent sustainability reporting standards and the International Sustainability Standards Board (ISSB) is now working to create a universally accepted sustainability reporting standard.