The budget is being presented in a few days, and one of the terms you will hear a lot of will be GDP, or Gross Domestic Product.

Definition of GDP
The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

In layman’s terms, GDP is all the money spent in the country in one year.

This is taken to mean that GDP is the value of the country. If GDP goes up, then the country is doing better.

However, what if you were to just turn over the same money twice as fast?

Here is an example.

A man finds a piece of wood, and carves it using a knife he was given by his father. This carving impresses a tourist so much, he gives the man £100 pounds. The man is happy with this money, and goes to buy a meal for his family in a local restaurant. The meal costs £50. During the week, the man spend the rest of his money on rent (£20), Vodka (£10) and food(£10) while saving £10 in the bank.

The restaurant where the man had his meal spent their £50 on paying for the food (£10) and wages (£30) and the rest (£10) went towards other bills.

This was also the case for the shop that sold the man his other items. However, the Vodka and the rent have an element of tax on them, so the government also get a share of the spend. E.g. the Vodka is £3 wages, £2 cost and £5 tax.

The end result is that the £100 equals a GDP of £100+£50+£20+£10+£10+£10+£10+£30+£10+£3+£2+£5 or £260 or so!

The end figure will become larger as we still need to count the element of the rent costs and other bills.

If this means that £100 suddenly can become £240 worth of GDP, is should appear obvious that GDP can be influenced by just spending the same money faster, or through more hands.

If the man had spent his initial £50 on paying off his credit card bill, and had then paid for his meal using the credit card, the GDP figure will have increased by £50, because there was now another transaction happening. If the restaurant had to pay a small tax on the meal (a green tax for instance), then GDP would also go up by a small percentage.

GDP is not the value of a country, only the value of all the transactions within that country. In business terms, this is the country’s turnover.

The old business saying goes, Turnover is Vanity while profit is sanity. I wonder if the Chancellor has heard this one?