GDP – National output

According to Professor Diane Coyle and economist Benjamin Mitra-Kahn in a paper entitled ‘Making the future count’, an entry and eventual winner of the Indigo prize:

  • Economic statistics (i.e. state data) originated with governments wanting to raise taxes to wage wars i.e. wanting to know the availability of resources
  • Then, in the early 20th century, they added economic progress i.e. economic welfare
  • Then John Maynard Keynes et alia set up an aggregate GDP (Gross Domestic Product) to measure the total flow of money in any economy from the production sector to households in return for consumers paying for the goods and working for a wage – household expenditure, output sales and total incomes were thought to be identical

Since then, when statisticians attempt to measure a country’s output, they tot up everything it makes, everything it buys and everything it earns – and since one person’s spending is deemed to be another person’s earnings, in theory the answers should be the same

Hence, in the UK, the ONS – Office for National Statistics – uses three definitions of GDP to determine the market value of all goods and services produced within the UK’s borders in a given time viz:

  1. Output measure – the value of all goods and services produced by all sectors of the economy, including the government
  2. Expenditure measure – the value of goods and services bought by households and government, investing in machinery and buildings, and net exports
  3. Income measure – the value of income generated mostly in terms of profits and wages

In theory, all three should produce the same final number for GDP – whilst each measures different things differently, together they are said to act as a check on the accuracy of each other

The accepted formula for GDP is:

                            GDP = C + I + G + (X-M)
    • C = Private consumption of final goods and services
    • I = Gross investment in the economy, public and private, in new buildings, highways, ports, plant and equipment, IT
    • G = Government spending on labour, goods and services (n.b. purchases of weapons but not ‘benefits’) and capital investments
    • X – M = Net foreign trade = Balance of (Exports – Imports)

Overall, calculation of quarterly GDP figures is a major exercise:

  • The ONS collects data from a wide range of sources including some 46,000 firms as well as government departments
  • They produce a first estimate of GDP 25 days after a quarter has ended based solely on the output measure
  • And they have to break this number down into increases in value due to inflation versus rises in real output, which ‘is not easy’

Hence, their first figure is more a guestimate which often has to be revised later

Indeed, there have always been serious doubts about the accuracy and so usefulness of GDP figures raised by many economists – although usually silenced by the retort: “There’s nothing better out there”


  • GDP is an 20th century old-economy measure still in use for the 21st century new-economy – it’s relevant to the old physical/ tangible world but incomplete for the new mental/ intangible world
  • GDP is not a comprehensive measure of human welfare
  • We need complementary measures to complete the modern well-being picture

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