Gross domestic product, or GDP, is the total monetary value of all goods and services produced within a set geographical area, usually a country or state, within a given time period, usually over the span of one year or one quarter.
Gross domestic product is composed of consumption, investment, government expenditures and the balance of trade.
Gross Domestic Product as an Economic Indicator
Gross domestic product is unarguably the most important statistical measure of economic activity.
While there are numerous well-known issues involved in the generation and comparison of gross domestic product values, it remains by far the most useful means for evaluating economic performance.
Moreover, since everything produced by an economy must be paid for, gross domestic product also serves as the basis for gross national income, which is a sister-measure that offers a similar value as the total income produced within a set geographical area in a given period of time.
Gross domestic product is often broken down into a ‘per capita’ (per person) value for making comparisons between different geographical areas. This allows for analysis of comparative wealth levels on a per person basis, which accounts for the greater economic activity created by a greater amount of people.
Gross domestic product serves as the foundation for a number of other essential statistical measures of economic activity, such as productivity.
Real Gross Domestic Product and Nominal Gross Domestic Product
It is important to note the distinction between real gross domestic product and nominal gross domestic product.
Nominal gross domestic product measures economic activity in present monetary values, while real gross domestic product measures it in a base monetary value that does not change over time.
For example, a comparison between nominal gross domestic products in 2018 and 2008 will be measured in 2018 dollars and 2008 dollars respectively. By contrast, a comparison between the real gross domestic products of 2008 and 2018 will be measured solely in 2008 dollars.
While real gross domestic product provides a more accurate basis for comparison, nominal gross domestic product is still an important economic measure that incorporates the effects of inflation on economic wealth and activity.
Gross Domestic Product and Trading
Gross domestic product is an essential economic indicator for day traders to understand and employ.
Foremost gross domestic product as a measure of economic activity will have a major influence on the share prices of companies who sell in that geographical area.
Higher rates of economic activity will mean more income and wealth in that area, and a greater demand for goods and services of all sorts.
In addition, higher gross domestic product per capita measures will indicate a shifting demand in what consumers are looking to buy, such as a shift toward meat and cars as consumers grow wealthier.
Gross domestic product data prints can also be used to create direct actionable trades, generally in currencies and equity indices.
Final Thoughts
Gross domestic product as a statistical measure is so absolutely central to how modern economic activity is understood that every day trader must be comfortable with how these numbers are generated and used.
Not only is gross domestic product essential to valuing almost every security in the market, but gross domestic product data prints also generate actionable trading opportunities, mostly in currencies and equity indices.