Gross Domestic Product
The Gross Domestic Product (GDP) is a calculation
that measures the total production output of goods and services by a
given country.
It has proved to be the most thorough gauge of economic
performance. Measured in both nominal and real (or
inflation-adjusted) terms, GDP is the sum of four main components:
net exports, private investment, private consumption, and government
purchases. In terms of country analysis, the GDP is similar to the
Gross Profit Margin of a company in that both account for change in
growth.
Both the real GDP - calculated with regard to the changes in
inflation - and the nominal GDP - calculated using only current
dollar values without taking into account any deflators or
multipliers - are reported. Nominal GDP is useful for
observing the market value of goods and services produced in a given
year or quarter. Real GDP is the quantity of economic output, a
factor in the calculation of the overall rate of economic growth.
The key figure within the mass of data contained in the GDP is the
percentage growth over the previous quarter and over the previous
year.
The complete report consists of three releases: 1) advanced, 2)
preliminary and 3) final. The preliminary and final releases come
out in the months before the final, and have a greater impact on the
Forex market.
Fundamental Analysis of the GDP
Fundamental Analysis of GDP is critical, since central banks
monitor this indicator to identify increasing inflation.
An increase in GDP indicates a strong economy, but may
signal inflation and thus an increase in interest rates.
A decrease in GDP is a sign of lowering productivity and
thus a weaker economy.
Average GDP growth clocks in at 2.5 to 3% annually; any higher
than that is an indication of possible inflation, since with
greater economic productivity inevitably comes inflation. If
such is the case, central banks like the FED and the ECB tend to
tighten monetary policy by increasing interest rates in an attempt
at slowing the economy’s rate of growth. A decrease in GDP is
often pre-empted by an increase in nation-wide inventories - common
factors like slowing growth and changing consumer demands affect
both.
Because it is released quarterly, the GDP's data often lags a bit
behind, diminishing its use as a predictive indicator. Most
traders focus on the Advance Report and the Preliminary Report
since they are released in the months before the final figure -
large discrepancies between the earlier and final GDP reports often
cause significant volatility.
GDP numbers are released by the Bureau of Economic Analysis on
a quarterly basis on the 25th of the month at 8:30 am EST
