Gross Domestic Product: A Brief Explanation
Gross Domestic Product (GDP) or Gross Domestic Product (GDP) in Indonesian, is believed to be one of the important indicators that measures the economic “health” of a country. In forex trading, GDP is one of the important economic data ( big figures ) that traders pay attention to to read the potential direction of the next market movement.
This time we will try to explain briefly and simply about what and how the GDP actually is. How exactly does this GDP data affect the market and the general public?
What is GDP?
GDP is a representation of the total value of sales of all goods and services produced within a certain period of time. In short, GDP is everything that is produced by society and business, including the salaries of workers.
GDP data is also a way to find out which sectors of the economy are experiencing growth or decline.
In the United States (US), this GDP figure is calculated and announced quarterly by the Bureau of Economic Analysis (BEA), which is part of the US Department of Commerce. BEA often revises estimates – whether up or down – along with the development of data received throughout the quarter.
Usually, the GDP figures are announced compared to the previous quarter or year. For example, if GDP in the second quarter rises three percent, this means that the country’s economy has grown by three percent throughout the first quarter.
How is GDP calculated?
Calculating GDP is actually rather complicated, but simply the calculation can be done at least one of two ways. It could be by adding up all community income in a year, or adding up all public expenditure. All calculation paths should produce more or less the same data.
Calculation methods that use income parameters are obtained by adding up the income of all employees, company profits, copyright income, rental income and net interest income.
While the method with expenditure approach is calculated by adding up total consumption, investment, state expenditure and net exports.
Nominal GDP and Real GDP
This may also be a little tricky, but the point is that nominal GDP does not take into account inflation while real GDP takes into account inflation. This is an important difference because this is why some GDP reports have been revised.
Nominal GDP measures the value of goods and services produced within a certain period of time (eg quarter or year) using prices at that time. But the price level in general can increase due to inflation, which causes an increase in nominal GDP even though the amount of goods and services produced does not change. Even so, nominal GDP data does not reflect price increases. Well, this is where real GDP plays a role.
BEA will usually retreat to the previous quarter or year and measure the value of goods and services adjusted to measure inflation. This is then called real GDP ( real GDP ). To measure annual GDP growth, the real GDP is usually used, because these data provide a more accurate picture of the country’s economy.
How does GDP affect the general public?
A country’s economy is usually considered “healthy” if the unemployment rate is low and wages increase, because the business sector needs more workers to compensate for economic growth.
However, if GDP growth is too fast, the central bank (if in the US, is the Federal Reserve / Fed) is likely to raise interest rates to offset inflation – in other words, rising prices for goods and services. This could mean that the cost (interest) needed for vehicle and housing loans will be even higher. In turn, the business sector will also feel the impact, where there is an increase in costs for capital loans and / or pay salaries / wages of workers.
Conversely, if the GPD slows down, or the term is negative, it will also trigger fears of a recession that could result in an increase in the number of termination of employment and a decrease in business income and public spending.
How does GDP affect investors?
Investors monitor GDP growth to assess whether economic growth is changing rapidly or not, so they will be able to decide on the placement of their assets. The deterioration of the economy usually means a decrease in profits earned by entrepreneurs, which can have a negative impact on the value of their company’s shares.
GDP data can also help investors to decide which countries are the best investment opportunities. Most foreign investors choose to buy a company or invest in a country whose economy is developing. In other words, if many foreign investors come to a country to invest, that means they think the country’s economy is good and the prospects are good.
How to use GDP data for traders?
In forex trading , the GDP data that is most noteworthy is the release of GDP data from developed countries such as the UK, the Euro region and – of course – the populars are GDP data from the US.
As explained earlier, the increase in GDP figures means the country’s economy is growing. As a result, an increase in GDP data is usually followed by a strengthening of the country’s currency. Conversely, if the GDP figure declines, it is usually followed by a weakening of the country’s currency.
So, if you see the release of US GDP data rising from – for example – 2% to 3%, it is likely to be followed by a strengthening of the USD. In other words, you can open long positions against USD. That is, among the transactions that you can do for example is to open a SELL position for GBP / USD, SELL EUR / USD, or BUY USD / JPY.