It’s one of the key ways of measuring the state of the economy. GDP, or Gross Domestic Product, is used by businesses to judge when it’s time to hire or fire. In addition, the government rely on it to work out whether to splash some cash or collect more tax.
So what is GDP? How does it affect you? And what are the predictions for 2021?
What is GDP?
GDP is the final value of the goods and services produced in a given period, usually a year. It’s calculated by adding up all of the money spent by consumers, businesses, and the government during this time. As such, it’s a good indicator of the economic performance of a country.
What does rising and falling GDP mean?
Rising GDP is a great sign; it means that the economy is growing, people are doing more work, and are getting richer. It means more jobs will be created and pay rises will increase. Conversely, falling GDP suggests that the economy is shrinking. If GDP declines for two quarters in a row, this is considered a recession.
If GDP declines for two quarters in a row, this is considered a recession
How does it affect you?
The government use GDP to decide how much to spend on public services and how much is needed to be raised in taxes. Rising GDP will mean you pay more tax because you’re earning and spending more. On the plus side, this means more will be spent on essential services such as schools, police and health care.
What are the limitations of GDP?
The main issue is that GDP doesn’t tell us how the income is split across the population. Rising GDP may be a result of the richest individuals getting richer, rather than the population as a whole. GDP also rises with a population increase, but this doesn’t mean that the standard of living is improving.
How was GDP affected by the pandemic?
It will be no surprise to hear that the coronavirus crisis has had a devastating impact on the UK economy. The GDP declined by 9.9% in 2020. This decline is the most severe recession seen in over 300 years.
What do economists predict for 2021?
It’s not all bad news. Economists have revised down their unemployment forecasts to just 5.8% by the end of the year. And EY's chief economic adviser had some hopeful words about the latest forecast suggesting that the economy would ‘emerge from the pandemic with much less long-term scarring than was originally envisaged and looks set for a strong recovery over the rest of the year and beyond'.
“The economy will emerge from the pandemic with much less long-term scarring than was originally envisaged and looks set for a strong recovery”
What's the forecast for GDP?
The Bank of England is predicting that GDP will bounce back strongly this year. In fact, they're expecting the fastest expansion since the Second World War. In the latest reports, GDP is forecast to be back at pre-crisis levels by December. This is faster than forecasts for the rest of Europe, driven by the success our vaccine programme.
The future is looking bright.