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Ask Citywire: How is economic growth measured?
For a second time this year economic growth has beaten expectations, but what is it and why are the forecasts so wrong?
For a second time this year economic growth has beaten expectations, but why are the forecasts so wrong and is growth really a desirable goal?
How is growth measured?
Growth is seen by many as a social good since it is assumed that growth will drag the poor out of poverty.
The Office for National Statistics is responsible for gathering data about the UK economy. It measures the value of goods and services, the gross domestic product (GDP), four times per year.
The estimate is based on sales at around 40,000 companies and prices of around 200,000 products. The ONS says the first reading of GDP – three are produced for each quarter - covers about 40% of the data that will be included in the final reading and the rest of the estimate is based on forecasts.
Since the data measures the value of goods it is then adjusted for inflation to give us real GDP.
But the data doesn’t include the black economy and at a meeting this week the chief executive of Google UK said the full value of the online business in the UK is not being accounted for either.
Why is the data revised?
RBS’s Ross Walker was the only economist surveyed by Bloomberg that was spot on when it came to predicting yesterday’s third quarter growth number, which at 0.8% was twice as high as forecast.
Walker points out that much of the data on business services and finances is very preliminary. He said it is revised as firms get a better idea of their own business and as tax receipts are used to provide a better picture.
It isn’t surprising that the data is revised given that the first reading in the UK is produced just 25 days after the end of the quarter – faster than in any of the other larger economies.
Former Bank of England deputy Governor Rachel Lomax once estimated it takes up to three years to get a really accurate picture of the economy.
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