Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Calculating GDP: Assessing an Economy’s Health

GDP is probably the single most useful statistic in appraising the health of an economy, so calculating it accurately is vitally important. Unfortunately, working out a country’s GDP is no simple matter.

In this section we look at how GDP is calculated in the UK, why it’s not always 100 per cent accurate and also how to take into account improvement in the quality of goods. Other developed economies calculate GDP in a

similar way.

Introducing the basics

In the UK, the Office for National Statistics (ONS) is responsible for calculating GDP. It does so on a quarterly basis (every three months) by using three different ways of measuring GDP:

Calculating total income: Basically adding up everyone’s income in the UK, including people’s wages from work and firms’ profits paid out as dividends to their owners/shareholders. This figure is estimated by using data on firms’ profits, individuals’ weekly earnings, employer surveys and data from the UK tax authority (HMRC).


Calculating total output: Working out the value of all final goods that firms produce. This is done by surveying thousands of firms to obtain a detailed picture of exactly what they’re producing, in what quantities, using what inputs and for what price. To avoid double counting, only the value added by each firm is included. For this reason, this measure is often called gross value added (GVA). (See the section ‘Adding up total value added’ earlier in the chapter.)


Calculating total expenditure: Adding up the amount of money that consumers, firms, the government and overseas buyers spend on final goods and services in an economy. The ONS carries out a number of expenditure surveys of households, firms and the government to estimate total expenditure.


In Chapter 2 we discuss why an economy’s total income, total output and total expenditure over a period of time must be identical. In reality, measurement errors mean that these three different measures give slightly different results. The ONS then combines the information from all three measures to give a single estimate for GDP that quarter.