Tag: Nominal GDP

Sustained economic growth in Japan remains elusive. Preliminary Quarterly Estimates of GDP point to the Japanese economy having contracted by 0.4 per cent in the final quarter of 2015. This follows on from growth of 0.3 per cent in the third quarter, a contraction of 0.3 per cent in the second and growth of 1 per cent in the first quarter. Taken as a whole output in 2015 rose by 0.4 per cent compared to zero growth in 2014. The fragility of growth means that over the past 20 years the average annual rate of growth in Japan is a mere 0.8 per cent.

Chart 1 shows the quarter-to-quarter change in real GDP in Japan since the mid 1990s (Click here to download a PowerPoint of the chart). While economies are known to be inherently volatile the Japanese growth story over the past twenty or years so is one both of exceptional volatility and of repeated bouts of recession. Since the mid 1990s Japan has experienced 6 recessions, four since 2008.

Of the four recessions since 2008, the deepest was that from 2008 Q2 to 2009 Q1 which saw the economy shrink by 9.2 per cent. This was followed by a recession from 2010 Q4 to 2011 Q2 when the economy shrunk by 3.1 per cent, then from 2012 Q2 to 2012 Q4 when the economy shrunk by 0.9 per cent and from 2014 Q2 to 2014 Q3 when output fell another 2.7 per cent. As a result of these four recessionary periods the economy’s output in 2015 Q4 was actually 0.4 per cent less than in 2008 Q1.

Chart 2 shows the annual levels of nominal (actual) and real (constant-price) GDP in trillions of Yen (¥) since 1995. (Click here to download a PowerPoint of the chart). Over the period actual GDP has fallen from ¥502 trillion to ¥499 trillion (about £3 trillion at the current exchange rate) while GDP at constant 2005 prices has risen from ¥455 trillion to ¥528 trillion.

Chart 2 reveals an interesting phenomenon: the growth in real GDP at the same time as a fall in nominal GDP. So why has the actual value of GDP fallen slightly between 1995 and 2005? The answer is quite simple: deflation.

Chart 3 shows a protracted period of economy-wide deflation from 1999 to 2013. (Click here to download a PowerPoint of the chart). Over this period the GDP deflator fell each year by an average of 1.0 per cent. 2014 and 2015 saw a pick up in economy-wide inflation. However, the quarterly profile through 2015 shows the pace of inflation falling quite markedly. As we saw in Japan’s interesting monetary stance as deflation fears grow, policymakers are again concerned about the possibility of deflation and the risks that poses for growth.

As Chart 4 helps to demonstrate, a significant factor behind the latest slowdown in Japan’s growth is household spending. (Click here to download a PowerPoint of the chart). In 2015 household spending accounted for about 57 per cent by value of GDP in Japan. In the last quarter of 2015 real household spending fell by 0.9 per cent while across 2015 as a whole real household spending fell by 1.3 per cent. This follows on from a 0.8 per cent decrease in spending by households in 2014.

The recent marked weakening of household spending is a significant concern for the short term growth prospects of the Japanese economy. The roller coaster ride continues, unfortunately it appears that the ride is again downwards.


Quarterly Estimates of GDP Japanese Cabinet Office
Japan and the IMF IMF Country Reports
Economic Outlook Annex Tables OECD


Japan’s economy contracts in fourth quarter BBC News, (15/2/16)
Japanese economy shrinks again, raising expectations of more stimulus Telegraph, Szu Ping Chan (15/2/16)
Japan’s economy shrinks again as Abenomics is blown off course Guardian, Justin McCurry (15/2/16)
Japan’s economy contracts in latest setback for Abe policies New Zealand Herald, (15/2/16)
Japan’s ‘Abenomics’ on the ropes as yen soars, markets plunge Daily Mail, (15/2/16)
Japan economy shrinks more than expected, highlights lack of policy options CNBC, Leika Kihara and Tetsushi Kajimoto (15/2/16)


  1. Why is the distinction between nominal and real important in analysing economic growth?
  2. How do we define a recession?
  3. Of what importance is aggregate demand to the volatility of economies?
  4. Why are Japanese policymakers concerned about the prospects of deflation?
  5. What policy options are available to policymakers trying to combat deflation?
  6. Why is the strength of household consumption important in affecting the path of an economy?
  7. Why has Japan experienced an increase in real GDP but a fall in nominal GDP between 1995 and 2015?

When you are next in town shopping, just keep in mind that consumer spending accounts for a little over 60 per cent of GDP. Therefore, consumption is incredibly important to the economy. How consumers behave is crucial to our short-term economic growth. The second estimate of British growth from the Office for National Statistics shows that the economy expanded by 0.3 per cent in the first three months of 2013. This follows a 0.3 per cent decline in the final quarter of 2012. Real household expenditure rose by just 0.1 per cent in Q1 2013. However, this was the sixth consecutive quarter in which the volume of purchases by households has grown.

The growth in the economy is measured by changes in real GDP. Chart 1 shows the quarter-to-quarter change in real GDP since Q1 2008. (Click here to download a PowerPoint of the chart). During this period the economy is thought to have contracted in 10 of the 21 quarters shown. Furthermore, they show a double-dip recession and so two periods in close proximity where output shrank for two or more quarters. While more recent output numbers are frequently revised, which could see the double-dip recession possibly ‘statistically wiped’ from history, the period since 2008 will always been one characterised by anemic growth. The average quarterly growth rate since Q1 2008 has been -0.12 per cent.

Chart 2 shows from Q1 2008 the quarterly growth in household expenditure in real terms, i.e. after stripping the effect of consumer price inflation. (Click here for a PowerPoint of the chart). Over the period, the volume of household consumption has typically fallen by 0.18 per cent per quarter. Hence, consumption has feared a little worse than the economy has a whole.

While the annualised rate of growth for the economy since Q1 2008 has averaged -0.47 per cent that for consumer spending has averaged -0.73 per cent. However, these figures disguise a recent improvement in consumer spending growth. This is because the volume of consumption has in fact grown in each of the six quarters since Q4 2011. In contrast, the economy has grown in only 2 of these quarters. It is, of course, much too early to start trumpeting consumption growth has heralding better times, not least because the 0.1 per cent growth in Q1 2013 is the weakest number since positive consumption growth resumed at the back end of 2011. Nonetheless, the figures do deserve some analysis by economists to understand what is going on.

A slightly less promising note is struck by the gross fixed capital formation (GFCF) numbers. These numbers relate to the volume of investment in non-financial fixed assets, such as machinery, buildings, office space and fixtures and fittings. Chart 3 shows the quarterly growth in the volume of GFCF since Q1 2008. (Click here for a PowerPoint of the chart). The average quarterly rate of growth over this period has been -0.77 per cent. This is equivalent to an annual rate of decline of 3.9 per cent. GFCF has risen in only 7 of these quarters, declining in the remaining 14 quarters.

Worryingly, gross fixed capital formation has decreased in each of the last three quarters. While these figures may reflect continuing difficulties encountered by businesses in obtaining finance, they may also point to lingering concerns within the business community about the prospects for sustained growth. Therefore, it is important for economists to try and understand the drivers of these disappointing investment numbers and, hence, whether it is these or the slightly better consumption numbers that best hint at our short-term economic prospects.


Second estimate of GDP, Q1 2013 Office for National Statistics
Second Estimate of GDP, Q1 2013 Dataset Office for National Statistics


UK GDP: concerns about underlying economy as 0.3pc growth confirmed Telegraph, Philip Aldrick (23/5/13)
UK investment fall among worst in G8 Guardian, Phillip Inman (23/5/13)
UK first-quarter growth unchanged BBC News (28/5/13)
U.K. Economy Grows 0.3% on Inventories, Consumer Spending Bloomberg, Svenja O’Donnell (23/5/13)
Surge in consumer spending kept UK out of recession The Telegraph (28/5/13)
Boost in service sector activity The Herald, Greig Cameron (28/5/13)
Hopes dashed as household spending rises by just 0.1% The Herald, Ian McConnell (24/5/13)


  1. Why do we typically focus on real GDP rather than nominal GDP when analysing economic growth?
  2. What is meant by aggregate demand? Of what importance is consumer spending to aggregate demand?
  3. Why might the patterns we observe in consumer spending differ from those in other components of aggregate demand?
  4. What factors might influence the determination of consumer spending?
  5. What do you understand by gross fixed capital formation? What factors might help to explain how its level is determined?
  6. Of what significance is gross fixed capital formation for aggregate demand and for aggregate supply?
  7. What is a recession? What is a double-dip recession?
  8. What data would you need to collect to identify a recession?

We know two things about economic growth in a developed economy like the UK: it is positive over the longer term, but highly volatile in the short term. We can refer to these two facts as the twin characteristics of growth. The volatility of growth sees occasional recessions, i.e. two or more consecutive quarters of declining output. Since 1973, the UK has experienced six recessions.

Here we consider in a little more detail the growth numbers for the UK from the latest Quarterly National Accounts, focusing on the depth and duration of these six recessions. How do they compare?

The latest figures on British economic growth show that the UK economy grew by 0.9 per cent in the third quarter of 2012. However, when compared with the third quarter of 2011, output was essentially unchanged. This means that the annual rate of growth was zero. Perhaps even more telling is that output (real GDP) in Q3 2012 was still 3.0 per cent below its Q1 2008 level.

The chart helps to put the recent output numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (right-hand axis) and the level of output as measured by GDP at constant 2009 prices (left-hand axis). It captures nicely the twin characteristics of growth. Since 1970, the average rate of growth each quarter has been 0.6 per cent. This is equivalent to an average rate of growth of 2.35 per cent per year. The chart also allows us to pin-point periods of recessions.

One way of comparing recessions is to compare their ‘2 Ds’: depth and duration. The table shows the number of quarters each of the six recessions since 1973 lasted. It also shows how much smaller the economy was by the end of each recession. In other words, it shows the depth of each recession as measured by the percentage reduction in output (real GDP).

British recessions

Duration (quarters) Depth (output lost, %)
1973Q3–74Q1 3 3.25
1975Q2–75Q3 2 1.76
1980Q1–81Q1 5 4.63
1990Q3–91Q3 5 2.93
2008Q2–09Q2 5 6.28
2011Q4–12Q2 3 0.90

We can see that three of the recessions lasted for five quarters. In the case of the recessions starting in 1975 and 2011 they occurred very shortly after a previous recession. Hence, we observe two so-called double-dip recessions.

The table reveals that the deepest recession by some distance was that in the late 2000s. As a result of this recession, UK output declined by 6.3 per cent. As the recent GDP numbers show, the UK has yet to recover the ‘lost output’ that followed the financial crisis.


Quarterly National Accounts Time Series Dataset Q3 2012 Office for National Statistics
Statistical Bulletin: Quarterly National Accounts Q3 2012 Office for National Statistics


UK economic growth less than expected Sky News UK(21/12/12)
GDP growth revised down to 0.9% Financial Times, Claire Jones (21/12/12)
Uk borrowing higher than expected as GDP revised down BBC News (21/12/12)


  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at the chart above, summarise the key patterns in real GDP since the 1970s.
  3. What is a recession? What is a double-dip recession?
  4. Looking at the table, rank the recessions from 1973 by the amount of lost output.
  5. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  6. What factors might result in economic growth being so variable?

Economic growth in developed countries, like the UK, exhibits two important characteristics. First, growth is positive over the long run such that the volume of output increases over time. Second, growth in the short-term is highly variable with patterns in the volume of output creating business cycles. With increased global interdependence through trade and integrated financial systems, domestic business cycles often resemble a global or international business cycle. This was certainly the case during the late 2000s. Recent releases from the Office for National Statistics provide an opportunity to look again at the characteristics of UK economic growth. In particular, they show the importance of differentiating between nominal and real values. Furthermore, revisions to the data have somewhat revised our view of economic growth before and after the economic crisis of the late 2000s.

The value of goods and services produced in the UK in 2010, as measured by GDP, is estimated at £1.46 trillion. This is the nominal GDP estimate because it measures the economy’s output for 2010 using the prices of 2010. Back in 1948, GDP measured at 1948 prices was £11.97 billion. Based on these nominal estimates the size of the UK economy would appear to have grown some 122 times which is the equivalent of growing by 8.1 per cent each year. However, some of this increase relates not to the volume of output but to the prices of the goods and services produced. It is for this reason that when analysing economic growth we ordinarily look at constant-price or real estimates of GDP. Such estimates effectively show what GDP would have been if prices had remained at the levels of a chosen year known as the base year. The base year now being used in the UK is 2008.

GDP at constant 2008 prices in 2010 is estimated at £1.40 trillion as compared with £314.5 billion in 1948. The real GDP figures reveal that the volume of UK output increased not by a factor of 122 but by a factor of 4.44; this is the equivalent to growth of 2.4 per cent each year.

The nominal GDP estimates for each year from 1948 up to 2010 rise with only one exception: 2009. In 2009, nominal GDP fell by 2.8 per cent. However, over the same period, real GDP fell during seven of the years. What this tells us, is that in six of the seven years, price increases were enough to offset falls in the volume of output such that nominal GDP increased. However, in 2009, the average price of the economy’s output, which is measured by the GDP deflator, rose by a just a little under 1.7 per cent, while the volume of output and, hence, real GDP, fell by almost 4.4 per cent.

The real annual GDP numbers estimate that the volume of UK output declined both in 2008 and 2009. In 2008 output is thought to have fallen by 1.1 per cent, while in 2009, as we have just seen, it fell by 4.4 per cent. The last time the UK experienced two consecutive annual (yearly) falls in output was in 1980 and 1981 when output fell by 2.1 per cent and 1.3 per cent respectively.

If we want to identify recessions then yearly GDP numbers will not do, rather, we need to use quarterly GDP numbers. This is because we are looking for two consecutive quarters where real GDP (output) declined. The revised GDP data show that the UK experienced five consecutive quarterly falls in real GDP in the late 2000s. We went into recession in Q2 of 2008 and came out in Q3 of 2009. As a result, real GDP was 7 per cent lower than before the UK economy entered recession. The previous recession, from Q3 of 1990 to Q3 of 1991 (5 quarters), saw UK output fall by 2.5 per cent. Between these two recessions the UK experienced 66 consecutive quarters of economic growth during which time the revised estimates show that the average annual rate of growth was 3 per cent. Compared with the recession of 2008/09, the next deepest recession in recent times occurred between Q1 of 1980 and Q1 of 1981 (5 quarters) when output fell by 4.7 per cent. In other words, these figures help to illustrate the extraordinary depth of the 2008/9 recession.


QE plus Economist (8/10/11)
Cameron steadfast as economy halts Sky News Australia, Matt Falloon and Christina Fincher (6/10/11)
Recession was deeper and recovery slower than expected Telegraph, Philip Aldrick (31/10/11) )
Mr Cameron, GDP and the hole in the recovery BBC News, Stephanie Flanders, (5/10/11)
UK economy grinds to virtual halt AFP (5/10/11) )
Recession concern as economy fails to grown Herald Scotland, Ian McConnell (5/10/11)


Quarterly National Accounts, Q2 2011 Office for National Statistics (5/10/11)
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission


  1. Explain what you understand by the terms nominal GDP and real GDP. Can you think of other examples of where economists might distinguish between nominal and real variables?
  2. Explain under what circumstances nominal GDP could rise despite the output of the economy falling.
  3. The average annual change in nominal GDP since 1948 is 8.2% while that for real GDP is 2.4%. What do you think we can learn from each of these figures about long-term economic growth in the UK?
  4. What do you understand to be the difference between short-term and long-run economic growth?
  5. What is meant by the concept of a business cycle? In what ways can the characteristics of business cycles differ across time? What about across countries?
  6. How might the position within the business cycle impact on an economy’s potential output?
  7. What factors might influence a country’s long-term rate of economic growth?

Just how large is the UK’s Gross Domestic Product and how quickly is it growing? Well, the latest Quarterly National Accounts from the Office for National Statistics show that the value of our economy’s output in Q3 2010 was £365.9 million. When measured across the latest four quarters, i.e. from the start of Q4 2009 to the end of Q3 2010, the total value of our economy’s output was £1.440 trillion. Across calendar year 2009 the UK’s GDP is estimated to have been £1.394 trillion.

When analysed in terms of the expenditure on the goods and services produced in the latest four quarters, household final consumption contributed £910.4 billion towards Gross Domestic Product. In other words, household expenditure over these four quarters was equivalent to 63% of GDP, exactly in line with its average since 1948. This only serves to demonstrate just how important the spending by households is for our short-term economic prospects.

Another important expenditure-component of GDP is gross capital formation. This is capital expenditure by the private and public sector and is estimated to have been £202.9 billion over the latest four quarters, equivalent to 14% of GDP. This is an important component because as well as affecting current levels of GDP, it also affects our economy’s potential output. This points to changes in capital expenditure having both a demand-side and a supply-side impact. Interestingly, the long-term average share for gross capital formation in GDP is around 18% and so about 4 percentage points higher than is currently the case.

So we now have a number which reflects the size of our economy: a little over £1.4 trillion. But, what about the rate at which the economy is growing? This time we have to be a little careful as to which GDP numbers we are using. The numbers we have so far considered have been measured at current prices and so at prevailing prices. When analysing the rate of economic growth, rather than analyse GDP at current prices, economists look at GDP at constant prices. By doing this we can immediately see whether the volume of output has increased. This is important because in the presence of price rises, an increase in the value of output could occur even if the volume of output remained unchanged or actually fell. For instance, in 1974 the volume of output or real GDP fell by 1.3%, but because the average price of our domestic output (known as the GDP deflator) rose by 14.8%, GDP measured at current prices rose by nearly 13½%.

The latest ONS figures show that real GDP grew by 0.7% in the third quarter 2010. For the record, GDP at current prices (nominal GDP) grew by 0.9%. The 0.7% increase in GDP in volume terms is down on the 1.1% figure for Q2. While this appears to constitute a reasonable rate of economic growth we can see from the articles below the concern amongst commentators that this third estimate of growth for Q3 had seen a downward revision from the previous estimates of 0.8%. Nonetheless, when compared with Q3 2009, the output of the UK economy in Q3 2010 is estimated to have grown by 2.7%. This is the strongest annual rate of economic growth since the third quarter of 2007.

Despite its relatively low historic share of GDP, gross capital formation was the most rapidly growing expenditure component in Q3, increasing by 5.2% over the quarter and by 16.6% over the latest four quarters. Household spending grew by 0.3% over the quarter and by 2% over the latest four quarters. Meanwhile, government final consumption, i.e. those government purchases not classified as capital expenditures, fell by 0.4% over the quarter and by 1.3% over the latest four quarters. Finally, the volume of exports rose by 1.5% over the quarter and by 7.5% over the latest four quarters, but the volume of imports increased more rapidly rising by 1.7% over the quarter and by 10.3% over the latest four quarters. This has contributed to a UK trade deficit from the start of Q4 2009 to the end of Q3 2010 of a little over £40.5 billion.


UK recovery weaker than first thought, official data shows Telegraph, Emma Rowley and Philip Aldrick (23/12/10)
Service sector output dips Financial Times, Chris Giles (23/12/10)
UK’s official economic growth estimates revised down Guardian, Graeme Wearden (22/12/10)
UK economic growth revised down BBC News (22/12/10)
Economic growth weaker than thought Press Association (22/12/10)
UK economic growth in 3rd quarter revised downward Bloomberg, Robert Barr (22/10/12)
Economic growth ‘is lower than we thought’ admits ONS Scotsman, Natalie Thomas (23/12/10)
UK GDP growth: analysts view of the revised data Telegraph (22/12/10)


Latest on GDP growth Office for National Statistics (22/12/10)
Quarterly National Accounts, 3rd Quarter 2010 Office for National Statistics (22/12/10)
UK Economic Accounts, Time Series Data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission


  1. What do you understand by the terms nominal GDP and real GDP?
  2. Can you think of any other contexts in which we might wish to distinguish between nominal and real changes?
  3. The following are the estimates of GDP at constant 2006 prices:
    Q3 2009= £322.655bn, Q2 2010= £328.881bn, Q3 2010= £331.222bn
    Show how you would calculate both the quarterly rate of change and the annual rate of change for Q3 2010.
  4. What would happen to our estimates of the level of constant–price GDP in (3) if the base year for prices was 1986 rather than 2006? What would happen to the quarterly and annual growth rates you calculated? Explain your answer.
  5. Explain how gross capital formation could have both demand-side and supply-side effects on the economy? How significant do you think such supply-side effects can be?
  6. How important for short-term economic growth do you think household spending is? What factors do you think will be important in affecting household spending in the months ahead?