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Gross Domestic Product (GDP) Definition: Day Trading Terminology

GDP

Gross Domestic Product (GDP) Definition: Day Trading Terminology

Gross domestic product, or GDP, is the measure of the value of all a country’s goods and services produced over a specified period of time, usually annually or quarterly. Gross domestic product is the most important measure of a country’s economic strength, and is a central measure used in both politics and finance.

Gross Domestic Product Components

Gross domestic product is broken down into consumption, investment, government spending and the balance of trade (exports minus imports). Anything produced within a country will fall into one of these four categories.

The Significance of Gross Domestic Product

Gross domestic product is by far the most useful and popular measure for evaluating national economic strength and standards of living (since everything produced is also consumed or used).

International comparisons using gross domestic product allow for a highly accurate measure of the relative economic strength of different countries and their citizens’ standards of living. Countries in the rich world can have per capita GDPs that are as much as ten times those seen in poorer countries. A country’s advancement on a per capita GDP basis will lead to significant improvement in the economic lot of its citizens.

Gross domestic product is also used internally within countries to compare its economic strength from one period to the next. GDP is adjusted for inflation to offer a measure of the economic growth or stagnation within a country. Most advanced modern nations are expected to have GDP growth from one year to the next, and low growth or a shrinking GDP can lead to significant social and political unrest.

Gross Domestic Product and Trading

GDP is the most prominent measure of a country’s economic viability, which makes it an essential tool for any examination relevant to a country’s economic strength.

For example, the success of a new or expanded venture within a country will depend on that country’s forecasted GDP growth. Most projects rely on an expanding customer base, and a country with a stagnating GDP will have less income with which to purchase goods and services.

GDP measures can also affect the price of stocks, bonds and currencies more directly. As a measure of overall economic strength, whole classes of securities associated with a certain nation can be discounted based on a poor GDP reading for that country, for example.

All relevant national GDPs should be one of the first and most prominent measurements that any trader uses when evaluating the prospects of a company.

Final Thoughts

Gross domestic product is one of the few essential economic measures that should always be a part of any economic analysis. GDP is also useful as a rough measure for evaluating the current state of a country and the economic well-being of its citizens.

Measures of GDP play a large role in national political, economic and financial discourse, and quarterly and annual GDP readings are closely followed in the media and business. All traders should be in the habit of keeping up to date on the GDP readings for any country that they trade in or the GDP of countries where the securities that they are trading are affected.