GDP

Measuring and Analyzing Changes in GDP

To determine trends and patterns in economic activity, economists analyze the GDP growth rate.
A given GDP calculation is a snapshot of the economy at any given time. To determine trends and patterns in economic activity, it is necessary to measure change in GDP over a given period. Measuring changes to GDP in this way, by taking regular measurements, enables economists to track the rate and changes in GDP in order to see whether an economy is growing or stagnating, that is, not changing. The equation for this calculation is:
RealGDPgrowthrate=(CurrentormostrecentyearsrealGDPPreviousyearsrealGDP)/PreviousyearsrealGDP\mathrm{Real}\;\mathrm{GDP}\;\mathrm{growth}\;\mathrm{rate}\;=\;(\mathrm{Current}\;\mathrm{or}\;\mathrm{most}\;\mathrm{recent}\;\mathrm{year}'\mathrm s\;\mathrm{real}\;\mathrm{GDP}\;-\;\mathrm{Previous}\;\mathrm{year}'\mathrm s\;\mathrm{real}\;\mathrm{GDP})/\mathrm{Previous}\;\mathrm{year}'\mathrm s\;\mathrm{real}\;\mathrm{GDP}
.

The growth rate over time is the primary indicator of whether the economy is in a period of growth, recession, or depression. Recession and depression are periods of negative growth, or contraction in real GDP. A recession occurs when growth is negative for two consecutive quarters. A depression is a more prolonged period of GDP contraction, lasting years and resulting in rising unemployment and declining income. Measuring GDP growth also allows economists to spot trends in the forces powering GDP, whether positive or negative, by identifying the influence of certain sectors such as manufacturing, services, and even specific subsectors such as car manufacturing, on economic activity over time.

Trends determined by analyzing changes in real GDP inform the decisions of economic actors throughout the economy because GDP trends and projections are used to determine when to raise or lower interest rates, when to save, and when (and in which sectors) to invest. If GDP growth is slow, for example, the government may want to enact changes to fiscal or monetary policy in order to spur investment and growth.

Tracking GDP

Growth rate of real GDP or percentage change in real GDP over a period of sixteen quarters (four years). By tracking GDP, analysts note trends and events cause GDP to fluctuate. A sharp drop in 2014 Q1, for example, was partly due to a drop in consumer confidence and weather events.