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GDP measures the products and services produced by companies within the country and excludes companies’ earnings on foreign soils even though the profits are eventually added to the companies’ bottom lines. GNP, on the other hand, makes no distinction between the domestic and foreign earnings and bundles them together. It is believed that GDP is a more accurate indicator of the economic growth, at least domestically speaking.

GDP is calculated on quarter-over-quarter or year-over-year basis, and the change from one period to another is expressed in percentage points. Then using these percentage points one can see how the economy has performed on a quarterly, yearly, or even decade-long basis. A moderate and consistent GDP increase points to a healthy economic growth while large upward GDP moves indicate a rapid economic expansion. Conversely a downward GDP trend points to a shrinking economy. Usually negative or large upward GDP trends raise a red flag that the economy is or soon will be in trouble. Read on to find out why.

Recession And Inflation

A negative GDP trend indicates that the economy is not productive and not enough money is changing hands. If the trend continues (for at least two consecutive quarters) it could signal a condition known as recession. During recession jobs are lost and incomes shrink as there are not enough goods and services produced to support job creation. As more jobs are lost, spending slumps (as there are fewer people with money to spend) thereby shrinking the economy further until recession turns into depression. Depression is usually accompanied by mass poverty and low morale in the general public. With nowhere to turn, people (and businesses) usually look to the government for assistance but such a large demand could (and usually does) rapidly deplete …