GDP is a term you would have likely heard in the reporting of financial news, but what does it actually mean?

Standing for gross domestic product, the concept of GDP is significant for measuring how healthy a country's economy is.

Here's all you need to know about what GDP is, and the potential consequences of it contracting.

What is GDP?

According to the Bank of England website GDP is "a measure of the size and health of a country’s economy over a period of time (usually one quarter or one year)."

They add: "It is also used to compare the size of different economies at a different point in time."

How is GDP measured?

GDP is measured by the ONS (Office for National Statistics) in each quarter (every three months) where it collects data from thousands of different companies.

The Bank of England website states that there are three ways to measure GDP which are:

  • The total value of goods and services (‘output’) produced
  • Everyone’s income
  • Or what everyone in the country has spent

They add: "You get different figures depending on which method you use because there’s never enough data to build a picture of the economy that’s 100% complete."

The last measure, total spending, can essentially be broken down into household spending, investments, Government spending and net exports.

The Bank of England says: "Household spending forms the biggest part, accounting for about two-thirds of GDP. Meanwhile, a business buying new equipment or a construction company building houses are examples of investment.

"So when you hear talk of a country’s ‘output’, ‘expenditure’ or ‘income’, these are all ways to measure GDP."

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What it means for GDP to go up or down

If GDP goes up each quarter then it means the economy is growing, but if it falls it means the economy is shrinking.

One consequence of GDP falling is that if it drops for two quarters in a row, that is known as a recession, which can lead pay freezes and job losses.