Q&A: What is GDP?

Retail is one of the sectors which makes up GDP

The latest official figures showing the size of the UK economy are due to be released later.

The Gross Domestic Product figure is widely expected to show that the UK economy shrank between July and September - having been flat in the previous three months.

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What is GDP?

Gross Domestic Product (GDP) is the most commonly used indicator of national income.

It attempts to measure the sum of incomes received by the various wealth-creating sectors of the economy, from manufacturing and retail to agriculture and service industries.

In the UK, this data is published and revised every three months by the Office for National Statistics.

Essentially, it tells us how much money was made in the economy over a certain period of time.

The figures are "gross" because GDP does not allow for the depreciation of physical capital - wear and tear on factory machines, office equipment becoming outdated etc.

Does inflation not skew results?

When measuring output over a period of time, it is essential to remove any increase in the value of output caused by inflation.

So when producing productivity estimates, the ONS takes this into account - calculating price indices known as deflators.

What is the difference between GDP and Gross National Product (GNP)?

When the value of income from abroad is included - what domestic companies earn abroad, minus what foreign companies earn here and send overseas - then the GDP becomes the Gross National Product (GNP).

This is particularly important for economies with large traded sectors, which includes many developing countries.

How does a country measure wealth?

A crude measure of a country's wealth is Gross National Product (GNP) per capita: the figure for GNP divided by the population.

In order to compare GNP per capita across countries, there is the need to use a common currency. Most international institutions, such as the World Bank, use the US dollar for this purpose.

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But this may give a misleading picture of how much an individual in a particular country can actually purchase in his or her own currency.

Many of the transactions which make up the income of an economy are not traded internationally.

The fluctuating nominal values of currencies also makes credible comparisons difficult. The Economist newspaper regularly reports its Big Mac index - the price of a McDonald's hamburger in different currencies - in a no-garnish, ready-to-go estimate of the real value of the dollar in different countries.

To respond to these problems, economists have devised an alternative measure known as Purchasing Power Parity (PPP), which tracks the cost of a basket of traded and non-traded goods and services across countries.

This gives a better indication of the purchasing power of an economy and consequently, its relative wealth.

So is this misleading?

But even this is not without problems. Critics point out that the baskets of goods and services across economies are not always directly comparable.

In some countries, for example, services such as healthcare are free and carried out by the government. The statistician must estimate the cost of providing these services, which may differ greatly from the cost of purchasing private medical services in other countries.

But for most of us, real wealth will not be found in the arcane alphabet soup of economic indicators, but in the starker credit and debit entries of our bank statements.