Gross Domestic Product (GDP) is the the
broadest measure of economic activity.
Annualized quarterly percent changes in GDP
reflect the growth rate of total economic
output. The figures can be quite volatile
from quarter to quarter. Inventory and net
export swings in particular can produce
significant volatility in GDP. The final
sales figure, which excludes inventories,
can sometimes be helpful in identifying
underlying growth trends as inventories
represent unsold goods, and a large
inventory increase will boost GDP but might
be indicative of weakness rather than
strength. The broad components of GDP are:
consumption, investment, net exports,
government purchases, and inventories.
Consumption is by far the largest component,
totalling roughly 2/3rds of GDP.
In addition to the GDP figures, there are
GDP deflators, which measure the change in
prices in total GDP and for each component.
Though the consumer price index is a more
closely watched inflation indicator, the GDP
deflator is another key inflation measure.
Unlike CPI, it has the advantage of not
being a fixed basket of goods and services,
so that changes in consumption patterns or
the introduction of new goods and services
will be reflected in the deflator.
With both GDP and the deflator, the
market tends to focus on the quarter/quarter
change. Year/year changes are also cited
frequently, though they do not provide the
most timely indications of economic activity
or inflation. The bond market often reacts
to GDP, though the price moves are typically
small, as much of the GDP data is easily
predicted using monthly economic releases
such as personal consumption, durable goods
shipments, construction spending,
international trade, and inventories.
Quarterly GDP reports are broken down
into three announcements: advance,
preliminary, and final. After the final
revision, GDP is not revised again until the
annual benchmark revisions each July. These
revisions can be quite large and usually
affect the past five years of data.
GDP = Consumption + Gross Investment
+ Government Spending +
(exports - imports)
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