Gross Domestic Product

Gross Domestic Product

What is GDP (Gross Domestic Product)

GDP

In the 21st century, the power of a country is not measured by its armed forces or population, but by its economic strength. Using investments and import-export activities as a tool, countries can gain influence and control the economies of their enemies and allies.

This power is acquired through gaining economic independence by robust production. The more a country produces, the more value it creates. The total value of a country’s economic production is measured using Gross Domestic Product, which reflects the stability, reliability, and growth of the economic activities in the country.

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What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the total value of goods and services produced in a country. It is calculated periodically, usually on a quarterly or yearly basis, to measure how the economic value of the local production activities is changing over time.

Positive GDP figures indicate expansion of the economy while declining figures signify that the economy is shrinking. If the periodic change in GDP is negative for two consecutive periods, the alarm bells might start ringing as it would be considered as a signal for an economic recession.

GDP is a lagging indicator – meaning that it is calculated only after the focused period is over. Therefore, it doesn’t account for the economic change in real-time, but only in retrospect.

Since it measures the change in the aggregated economic value in a relatively large period, GDP is often considered as the benchmark economic indicator of a country’s economic health and growth.

The modern version of GDP was introduced in 1934 by Simon Kuznets, a Nobel laureate in economics. Kuznets’ GDP formula includes the economic activities of both native and foreign economic entities within the borders of the country, but excludes native entities located abroad.

In this aspect, GDP differs from production-based Gross National Product (GNP) and income-based Gross National Income (GNI) national economic value measures, as these measures include all native economic entities, whether domestic or abroad, and exclude foreign entities operating within the country.

In general, GDP is based on four key elements: private and public consumption, private and public investments, government spending, and the balance of foreign trade activities. Based on this information, the national statistics agency in each country calculates the GDP and publishes a periodic report which includes:

  • The raw figures, known as the Nominal GDP inflation-adjusted figures, known as the Real GDP
  • periodic change in percentages, known as the GDP Growth Rate
  • The distribution to population, known as the GDP per Capita

Top 10 Countries in Nominal GDP per Capita

Country Nominal GDP per Capita
  Luxembourg   $113,196
  Switzerland   $83,716
  Macau   $81,151
  Norway   $77,975
  Ireland   $77,771
  Qatar   $69,687
  Iceland   $67,037
  United States   $65,111
  Singapore   $63,987
  Denmark   $59,795

How to Calculate Gross Domestic Product?

GDP measures the value of all goods and services produced for sale in a specific country. There are three primary approaches to calculate Gross Domestic Product, though they all yield the same figures regardless of the formula. These are based on spending, output, and income.

GDP based on Expenditure

The expenditure approach to GDP takes into consideration the spending activities by citizens, private businesses, the government, and the difference between export and import figures.

GDP(E) = C + I + G + Nx

  • C – Consumer Spending: the amount of spending by local consumers, representing over two-thirds of the GDP and making Consumer Confidence a major predictor of growth.
  • I – Investments: the amount of domestic investments by private companies, showing the confidence of local businesses to invest in business activities and employment.
  • G – Government Expenditure: the amount of spending by the government on infrastructure and industry, indicating the level of basic demand for the economy.
  • Nx: Net Balance of Tradethe difference between exports and imports, revealing the value gained from selling local products abroad, minus the value expended to foreign economies.

GDP based on Production

Unlike expenditure formula, which is based on the gross sales figures, production approach to GDP is based on the net value.

GDP(P) = Sum of all production output – Sum of intermediate input costs

  • Sum of all production output: the total value of the goods and services produced
  • Sum of intermediate input costs: the total value of costs to produce goods and services

GDP based on Income

GDP based on income can be considered as a combination of expenditure and production approaches. It includes a wide range of items from the salary income of employees and profits of businesses to government taxes and interest returns.

GDP(I) = Total national income + Taxes + Depreciation + Nx

  • Total National Income: including a wide range of items such as salaries, business profits, government taxes, and interest returns.
  • Taxes: different direct and indirect taxes like property taxes and income taxes.
  • Depreciation: the reserve capital of companies to replace worn-out business tools.
  • Nx: same as in the expenditure approach, the total difference between exports and imports.

Nominal GDP vs. Real GDP

The prices of the goods and services included in GDP calculation can fluctuate due to many factors, and mainly by inflation. In order to establish whether the prices are changing due to actual business activities or inflation, two measures were created:

  • Nominal GDP: based on current market prices, without accounting for inflation or deflation.
  • Real GDP: based on nominal GDP, adjusted for inflation.

Real GDP = (Nominal GDP) / (GDP Deflator)

The inflation-adjusted Real GDP is calculated by dividing nominal GDP to an inflation reference, known as the GDP Deflator. GDP Deflator calculates the inflation rate of a base year (for example, the previous year) by finding the ratio between the base year’s nominal GDP and real GDP.

GDP Deflator = [(Nominal GDP of Base Year) / (Real GDP of Base Year)] x 100

GDP Deflator value is used to adjust the current year’s nominal GDP to find what is the actual total economic value when we account for the changes in the prices due to inflation. Real GDP is used for year-to-year comparisons, while quarters of the same year are compared with nominal GDP.

National GDP vs. GDP per Capita

The national GDP reflects the total economic value created by the entire nation. However, how this total value would reflect the citizens’ everyday lives depends on the size of the population. This is known as the GDP per Capita. 

GDP per Capita measures the average standard of living in a country by distributing the national economic value to the size of the population.

Dividing the national GDP to the population, we find how much economic value each citizen is supposedly getting on average. Yearly GDP per capita indicates the average annual earning of a citizen, while the quarterly report would indicate it for the respective quarter.

A high national GDP might display a country as economically strong; however, if the population is large, each citizen would accrue only a small portion of it, and the actual standard of living would be poor.

For example, India has a national GDP of $2.72 trillion; but, when distributed to 1.35 billion people, each person gets only about $2,000.

On the other hand, Luxembourg’s national GDP is only $70.89 billion, but each of their 600,000 citizens enjoys approximately $116,000 per year on average.

How to Trade with Gross Domestic Product Data Releases?

As the main economic indicator of economic health and growth, Gross Domestic Product reports have a strong influence on the market sentiment towards a country’s assets and often shake the markets with large-scale volatility. This volatility can last for hours, especially when the results deviate significantly from the analysts’ forecasts.

GDP is considered as a major part of fundamental analysis and marked as “high impact” in economic calendars. Unlike sector-specific data like employment or manufacturing reports, which shift the capital between the currency and stock markets, GDP results can boost or pressure all financial elements of the country. Let’s say the U.S. is expected to publish a quarterly GDP report. If the results are:

  • Better-than-expected: the economy is expanding, investors gain confidence, American assets like USD, Amazon stocks and S&P 500 index contracts gain value.
  • Worse-than-expected: the economy is shrinking, a recession may occur, high risk sentiment in the market causes American assets to lose value across the board.

The magnitude and speed of volatility created after GDP releases can create many high-risk & high-return opportunities. Therefore, it emerges as an important market event to consider when trading in the markets with a news trading strategy.

Key Gross Domestic Product Reports Around the World

GDP reports of major economic powerhouses are monitored closely due to their impact on the global economy. You can find more about the key GDP data releases below:

USA

EU

  • Region: Europe
  • Date of release: Quarterly and yearly
  • Issuing Agency: Eurostat
  • Affected Assets: EUR; EuroStoxx50; DAX 30, CAC 40; government bonds of EU-members

UK

  • Region: Europe
  • Date of release: Monthly, quarterly, and yearly
  • Issuing Agency: National Statistics
  • Affected Assets: GBP, EUR; British stocks; FTSE 100; UK Gilts

Canada

  • Region: North America
  • Date of release: Monthly, quarterly, and yearly
  • Issuing Agency: Statistics Canada
  • Affected Assets: CAD; Canadian stocks; S&P/TSX; Canada Marketable Bonds; Crude Oil

Japan

  • Region: Asia
  • Date of release: Quarterly and yearly
  • Issuing Agency: The Statistics Bureau of Japan
  • Affected Assets: JPY; Japanese stocks; Nikkei 225; Japan government bonds

China

  • Region: Asia
  • Date of release: Quarterly and yearly
  • Issuing Agency: National Bureau of Statistics
  • Affected Assets: CNY, AUD, NZD; Chinese stocks; China A50; Chinese Government Bonds

Australia

  • Region: Oceania, Asia
  • Date of release: Quarterly and yearly
  • Issuing Agency: Australian Bureau of Statistics
  • Affected Assets: AUD, NZD; Australian and New Zealand stocks and bonds; ASX 200 index

Get Ready for Next GDP Report with AvaTrade

As a major market-mover, Gross Domestic Product releases cause wide price fluctuations in the affected assets. Using AvaTrade’s comprehensive resources to analyse markets and powerful tools to manage our risk, we can trade on GDP reports with confidence.

  • Economic Calendar: AvaTrade’s own economic calendar includes the details of all GDP releases by the major countries.
  • A Wide Range of Assets: Key GDP reports affect key assets; you can trade all GDP-affected currency pairs, stocks, and indices with high leverage and low spreads.
  • Long & Short CFD Trading: Whether GDP figure is positive or negative, we can trade CFDs to benefit from both rising and falling prices without having to purchase the assets! No restrictions on short selling apply.
  • AvaProtect: GDP releases are highly volatile and risky, but AvaProtect enables us to easily manage our risk by hedging our positions directly on the trading platform.

Now that you know what Gross Domestic Product is and how GDP affects Forex markets. Turn your knowledge into power. What to do next? Check the economic calendar to see when the next GDP report is due.

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