GDP means Gross Domestic Product and is a measure of how much goods & services a country is producing within its borders (not imports).
When a country’s GDP is not growing it signifies unproductivity which equates high unemployment.
GDP is measured quarterly because investors need this information to make decisions and cannot wait till the end of the year. However, annual GSP is also collated at the end of each year.
An economy is deemed productive when its GDP is growing & inflation is not excessive.
When measuring GDP, it doesn’t matter who owns the factory; even if a British company operates branches in the United States, the output is added to United States GDP.
When GDP is adjusted for Inflation, we get the “Real GDP”
Care must be taken to ensure that the GDP growth recorded is actually a result of increased sales & productivity, & not the effect of a rise in prices of goods purchased due to inflation.
To prevent this, statisticians used a Price Deflator tool to ensure that GDP growth takes inflation into account. The end result is the Real GDP which means GDP growth that took inflation into account.
An increase in real GDP indicates economic growth and suggests the unemployment figure is low.
A falling GDP on the other hand means companies are not producing & are definitely not hiring new workers hence unemployment will be high.
What is the Ideal GDP for a healthy Economy?
3% is the ideal GDP growth rate for an economy to be considered healthy.
If an economy is growing at a rate below 3% it may be slowing down & headed for recession.
If a country is growing at a GDP rate above 3%, it may be growing too fast & face the risk of overheating & skyrocketing inflation.
Can Declining GDP Lead To a Recession?
Yes, the definition of a recession is when a country’s Real GDP declines for two consecutive quarters.
When a country is in a recession, its currency weakens because the government will be forced to lower interest rates to stimulate the economy.
Lower interest rates will mean investors will move elsewhere and the demand for the currency will weaken. This is why a forex trader should keep an eye on GDP especially for major currencies.
Limitations of GDP
Although Real GDP is adjusted for inflation, it is not adjusted for environmental pollution. Yes, a country may be productive but this productivity could be at the expense of the environment for example oil spillage etc.
A country could also increase its production at the expense of its peoples health & wellbeing & the IMF developed the Life Expectancy index to check this.
A country may be productive but due to income inequality, the majority of workers are not happy & this is why the IMF developed the Happiness Index.
Where Can I Find The United States GDP Data?
You can find the US GDP data on the Bureau of Economic Analysis (BEA) website https://www.bea.gov/news/current-releases
On a general note, if you are looking for GDP data for any country just go to their Bureau/Office of Statistics website & you will see the information.
For example you can get GDP for Australia by visiting the Australia Bureau of Statistics website https://www.abs.gov.au/statistics/economy/key-indicators & viewing their key economic indicators.
How To Know When GDP Data Will Be Released
Its a great idea to check for upcoming GDP releases so you can craft your trading strategy for that day.
For the United States GDP data, you can check for upcoming releases on the Bureau of Labor Statistics website https://www.bea.gov/news/schedule.
How To Trade With GDP News
Compare the GDPs of the Currencies in the Pair
Before trading a currency pair, compare the GDP data for both countries and then decide if to go long or short.
For example, if you want to trade USD/JPY you can look for the latest GDP quarterly growth figures for the US & Japan.
If the US GDP growth was higher than that of Japan, then it means the US Dollar should strengthen against the Japanese Yen.
In such a scenario, it will cost more Yen to buy 1 dollar so the USD/JPY exchange rate will be rising, so you can take a long position when trading.
Note that no fundamental analysis indicator should be used in isolation you must always combine them with other indicators.
Compare the latest GDP Figure with the Analysts Forecast
Before GDP data is released quarterly, analysts will always forecast the growth in GDP.
If the released GDP figure is better than the forecast then you can expect a lot of buying pressure.
For example if analysts forecasted the US economy was going to grow by 1% but when the GDP figures were released the economy grew by 3%, then lots of investors will flock to the dollar causing it to strengthen.
Compare the Latest GDP Figure with the Previous One
You can also compare the current GDP figure with the one for the last quartet. this will help you know if the economy is going into a recession.
Remember that declining GDP figures for two consecutive quarters indicates the economy is in recession territory.
For example, if the US recorded two consecutive quarters of GDP decline, while the UK recorded two quarters of GDP growth,; it means the US is in a recession.
In such a circumstance the dollar will be weak while the euro will be strong, so it will cost more dollars to buy 1 euro.
In such a circumstance, you should go long on the EUR/USD because the EUR/USD exchange rate is bound to rise.
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