Fundamental Analysis : What is the Difference Between GDP and Growth Rate

GDP (Gross Domestic Product) is the total dollar amount of all goods and services produced. The growth rate is the percentage increase or decrease of GDP from the previous measurement cycle. Even though the BEA reports quarterly, the growth rate is annualized so it can be compared to the previous year.

The GDP growth rate increases if retail expenditures, government spending, and exports increase. The growth rate will decline with increases in exports, inventory, and declines in consumer, business or government spending.

The GDP growth rate is the most important indicator of economic health. If GDP is growing, so will business, jobs and personal income. If GDP is slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve. This, in turn, can easily further depress GDP and consumers have less money to spend on purchases. If the GDP growth rate actually turns negative, then the U.S. economy is heading towards a recession.

Because so many things are measured in GDP, the BEA often revises the GDP growth rate within a month after releasing it. This can impact the stock market as investors get this new information about the state of the economy’s health.